Investors are always looking for growth in small-cap stocks like Toro Energy Limited (ASX:TOE), with a market cap of AU$52.21m. 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 crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into TOE here.
Does TOE produce enough cash relative to debt?
TOE has built up its total debt levels in the last twelve months, from AU$13.07m to AU$15.32m – this includes both the current and long-term debt. With this growth in debt, TOE currently has AU$5.18m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of TOE’s operating efficiency ratios such as ROA here.
Can TOE meet its short-term obligations with the cash in hand?
Looking at TOE’s most recent AU$15.45m liabilities, the company is not able to meet these obligations given the level of current assets of AU$6.27m, with a current ratio of 0.41x below the prudent level of 3x.
Does TOE face the risk of succumbing to its debt-load?With debt at 32.58% of equity, TOE may be thought of as appropriately levered. TOE is not taking on too much debt commitment, which may be constraining for future growth. TOE’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how TOE has been performing in the past. I suggest you continue to research Toro Energy to get a more holistic view of the stock by looking at:
- Valuation: What is TOE 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 TOE is currently mispriced by the market.
- Historical Performance: What has TOE’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.