Sparton Resources Inc (TSXV:SRI) is a small-cap stock with a market capitalization of CA$7.30M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Oil and Gas companies, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SRI here.
How does SRI’s operating cash flow stack up against its debt?
SRI’s debt levels have fallen from CA$719.55K to CA$257.76K over the last 12 months . With this reduction in debt, SRI’s cash and short-term investments stands at CA$191.50K for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of SRI’s operating efficiency ratios such as ROA here.
Can SRI meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$392.90K liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CA$226.20K, leading to a 0.58x current account ratio. which is under the appropriate industry ratio of 3x.
Does SRI face the risk of succumbing to its debt-load?
With debt at 19.19% of equity, SRI may be thought of as appropriately levered. This range is considered safe as SRI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with SRI, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Although SRI’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, 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 SRI has company-specific issues impacting its capital structure decisions. You should continue to research Sparton Resources to get a better picture of the stock by looking at:
- Historical Performance: What has SRI’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.