While small-cap stocks, such as Toro Energy Limited (ASX:TOE) with its market cap of A$82.33M, 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 vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into TOE here.
Does TOE generate enough cash through operations?
Over the past year, TOE has ramped up its debt from A$12.0M to A$14.2M – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at A$6.6M for investing into the business. Though 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 examine some of TOE’s operating efficiency ratios such as ROA here.
Can TOE pay its short-term liabilities?
Looking at TOE’s most recent A$14.5M liabilities, 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 0.56x, which is below the prudent industry ratio of 3x.
Is TOE’s level of debt at an acceptable level?TOE’s level of debt is appropriate relative to its total equity, at 28.71%. This range is considered safe as TOE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for TOE, and the company also has the ability and headroom to increase debt if needed going forward.
Are you a shareholder? Although TOE’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest keeping abreast of market expectations for TOE’s future growth on our free analysis platform.
Are you a potential investor? TOE seems to have a sensible level of debt, meaning there’s some room to take on more debt if needed. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of TOE’s track record. I encourage you to continue your research by taking a look at TOE’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.