Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Investors are always looking for growth in small-cap stocks like SilverBow Resources, Inc. (NYSE:SBOW), with a market cap of US$158m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into SBOW here.
Does SBOW Produce Much Cash Relative To Its Debt?
Over the past year, SBOW has ramped up its debt from US$245m to US$426m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$876k , ready to be used for running the business. Moreover, SBOW has produced US$147m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 34%, signalling that SBOW’s operating cash is sufficient to cover its debt.
Can SBOW meet its short-term obligations with the cash in hand?
With current liabilities at US$98m, the company may not have an easy time meeting these commitments with a current assets level of US$44m, leading to a current ratio of 0.45x. The current ratio is calculated by dividing current assets by current liabilities.
Can SBOW service its debt comfortably?
With total debt exceeding equity, SBOW is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether SBOW is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SBOW's, case, the ratio of 3.88x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SBOW ample headroom to grow its debt facilities.
SBOW’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure SBOW has company-specific issues impacting its capital structure decisions. I recommend you continue to research SilverBow Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SBOW’s future growth? Take a look at our free research report of analyst consensus for SBOW’s outlook.
- Historical Performance: What has SBOW's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.