Yuma Energy Inc (AMEX:YUMA) is a small-cap stock with a market capitalization of US$27.88M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into YUMA here.
How does YUMA’s operating cash flow stack up against its debt?
YUMA’s debt levels have fallen from US$40.10M to US$28.35M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, YUMA currently has US$137.36K remaining in cash and short-term investments , ready to deploy into the business. Additionally, YUMA has produced cash from operations of US$3.25M during the same period of time, resulting in an operating cash to total debt ratio of 11.45%, meaning that YUMA’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 a positive net income. In YUMA’s case, it is able to generate 0.11x cash from its debt capital.
Can YUMA meet its short-term obligations with the cash in hand?
At the current liabilities level of US$16.06M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.44x, which is below the prudent industry ratio of 3x.
Does YUMA face the risk of succumbing to its debt-load?
With debt reaching 79.04% of equity, YUMA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since YUMA is presently unprofitable, 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.
At its current level of cash flow coverage, YUMA has room for improvement to better cushion for events which may require debt repayment. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how YUMA has been performing in the past. I suggest you continue to research Yuma Energy to get a better picture of the stock by looking at:
- Valuation: What is YUMA 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 YUMA is currently mispriced by the market.
- Historical Performance: What has YUMA’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.