Is Strad Energy Services Ltd (TSX:SDY) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Strad Energy Services Ltd (TSX:SDY), with a market cap of CAD CA$90.02M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the energy equipment and services industry, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into SDY here.
Does SDY generate an acceptable amount of cash through operations?
Over the past year, SDY has ramped up its debt from CA$19M to CA$29M , which is made up of current and long term debt. With this growth in debt, SDY currently has CA$0M remaining in cash and short-term investments , ready to deploy into the business. On top of this, SDY has produced cash from operations of CA$9M in the last twelve months, leading to an operating cash to total debt ratio of 0.3x, indicating that SDY’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In SDY’s case, it is able to generate 0.3x cash from its debt capital.
Can SDY pay its short-term liabilities?
At the current liabilities level of CA$16M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.96x. For energy equipment and services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SDY face the risk of succumbing to its debt-load?
With debt at 16.31% of equity, SDY may be thought of as appropriately levered. This range is considered safe as SDY is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with SDY, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? SDY has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, its financial position may change. I recommend researching market expectations for SDY’s future growth on our free analysis platform.
Are you a potential investor? Although SDY’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more conviction in the stock, you need to also examine the company’s track record. As a following step, you should take a look at SDY’s past performance analysis on our free platform to conclude on SDY’s financial health.
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.
