While small-cap stocks, such as Buru Energy Limited (ASX:BRU) with its market cap of AU$129.61M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into BRU here.
Does BRU generate an acceptable amount of cash through operations?
Over the past year, BRU has reduced its debt from AU$10.99M to AU$7.50M – this includes both the current and long-term debt. With this debt payback, BRU’s cash and short-term investments stands at AU$16.86M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of BRU’s operating efficiency ratios such as ROA here.
Does BRU’s liquid assets cover its short-term commitments?
Looking at BRU’s most recent AU$15.43M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$21.17M, with a current ratio of 1.37x. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does BRU face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 11.70%, BRU’s debt level may be seen as prudent. BRU is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with BRU, and the company has plenty of headroom and ability to raise debt should it need to in the future.
BRU’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure BRU has company-specific issues impacting its capital structure decisions. You should continue to research Buru Energy to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for BRU’s future growth? Take a look at our free research report of analyst consensus for BRU’s outlook.
- 2. Valuation: What is BRU 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 BRU is currently mispriced by the market.
- 3. 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.