How Financially Strong Is Octanex Limited (ASX:OXX)?

Investors are always looking for growth in small-cap stocks like Octanex Limited (ASX:OXX), with a market cap of AU$3.40m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company's financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into OXX here.

How does OXX’s operating cash flow stack up against its debt?

OXX's debt levels surged from AU$5.41m to AU$9.99m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, OXX's cash and short-term investments stands at AU$3.70m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of OXX’s operating efficiency ratios such as ROA here.

Can OXX pay its short-term liabilities?

With current liabilities at AU$1.53m, it appears that the company has been able to meet these commitments with a current assets level of AU$4.08m, leading to a 2.66x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can OXX service its debt comfortably?

With a debt-to-equity ratio of 35.27%, OXX's debt level may be seen as prudent. This range is considered safe as OXX is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for OXX, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

OXX’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 an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for OXX's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Octanex to get a better picture of the stock by looking at:

1. Valuation: What is OXX 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 OXX is currently mispriced by the market.
2. Historical Performance: What has OXX'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.
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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.