While small-cap stocks, such as Tsakos Energy Navigation Limited (NYSE:TNP) with its market cap of US$286m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into TNP here.
Does TNP produce enough cash relative to debt?
Over the past year, TNP has reduced its debt from US$1.8b to US$1.7b , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$273m , ready to deploy into the business. Additionally, TNP has generated US$99m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 5.9%, signalling that TNP’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In TNP’s case, it is able to generate 0.059x cash from its debt capital.
Can TNP pay its short-term liabilities?
With current liabilities at US$385m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$378m, leading to a current ratio of 0.98x.
Is TNP’s debt level acceptable?
With total debt exceeding equities, TNP is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since TNP is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although TNP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how TNP has been performing in the past. I suggest you continue to research Tsakos Energy Navigation to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TNP’s future growth? Take a look at our free research report of analyst consensus for TNP’s outlook.
- Valuation: What is TNP 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 TNP 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.