While small-cap stocks, such as VAALCO Energy Inc (NYSE:EGY) with its market cap of US$140.80M, 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, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into EGY here.
How does EGY’s operating cash flow stack up against its debt?
EGY’s debt levels have fallen from US$14.44M to US$8.98M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, EGY’s cash and short-term investments stands at US$19.67M , ready to deploy into the business. Moreover, EGY has produced US$6.66M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 74.19%, signalling that EGY’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EGY’s case, it is able to generate 0.74x cash from its debt capital.
Can EGY pay its short-term liabilities?
With current liabilities at US$46.59M, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.78x, which is below the prudent industry ratio of 3x.
Does EGY face the risk of succumbing to its debt-load?
EGY’s level of debt is appropriate relative to its total equity, at 36.40%. EGY is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether EGY 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 EGY’s, case, the ratio of 18.19x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving EGY ample headroom to grow its debt facilities.
EGY’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for EGY’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research VAALCO Energy to get a more holistic view of the stock by looking at:
- Valuation: What is EGY 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 EGY is currently mispriced by the market.
- Historical Performance: What has EGY’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.