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While small-cap stocks, such as Transocean Ltd. (NYSE:RIG) with its market cap of US$3.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since RIG is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into RIG here.
Does RIG Produce Much Cash Relative To Its Debt?
RIG has sustained its debt level by about US$10b over the last 12 months – this includes long-term debt. At this constant level of debt, RIG's cash and short-term investments stands at US$1.9b , ready to be used for running the business. Additionally, RIG has produced US$404m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 4.0%, signalling that RIG’s operating cash is less than its debt.
Can RIG meet its short-term obligations with the cash in hand?
With current liabilities at US$1.4b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.72x. The current ratio is calculated by dividing current assets by current liabilities. For Energy 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.
Can RIG service its debt comfortably?
With debt reaching 77% of equity, RIG may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since RIG is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
RIG’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure RIG has company-specific issues impacting its capital structure decisions. You should continue to research Transocean to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RIG’s future growth? Take a look at our free research report of analyst consensus for RIG’s outlook.
- Valuation: What is RIG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RIG is currently mispriced by the market.
- 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.