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Investors are always looking for growth in small-cap stocks like Western Energy Services Corp. (TSE:WRG), with a market cap of CA$34m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Energy Services industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into WRG here.
How does WRG’s operating cash flow stack up against its debt?
WRG’s debt levels have fallen from CA$266m to CA$224m over the last 12 months , which also accounts for long term debt. With this reduction in debt, WRG currently has CA$4.4m remaining in cash and short-term investments , ready to deploy into the business. Additionally, WRG has generated cash from operations of CA$33m in the last twelve months, resulting in an operating cash to total debt ratio of 15%, signalling that WRG’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In WRG’s case, it is able to generate 0.15x cash from its debt capital.
Does WRG’s liquid assets cover its short-term commitments?
Looking at WRG’s CA$36m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of CA$52m, leading to a 1.44x current account ratio. For Energy Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can WRG service its debt comfortably?
With debt reaching 63% of equity, WRG may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since WRG is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
WRG’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. Since there is also no concerns around WRG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure WRG has company-specific issues impacting its capital structure decisions. You should continue to research Western Energy Services to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WRG’s future growth? Take a look at our free research report of analyst consensus for WRG’s outlook.
- Valuation: What is WRG 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 WRG 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.