Is Toro Energy Limited’s (ASX:TOE) Balance Sheet Strong Enough To Weather A Storm?

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, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into TOE here.

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

TOE’s debt levels surged from AU$12.02M to AU$14.17M over the last 12 months , which is made up of current and long term debt. With this growth in debt, TOE’s cash and short-term investments stands at AU$6.63M for investing 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. 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?

At the current liabilities level of AU$14.51M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of AU$8.14M, leading to a 0.56x current account ratio. which is under the appropriate industry ratio of 3x.

ASX:TOE Historical Debt Apr 8th 18
ASX:TOE Historical Debt Apr 8th 18

Does TOE face the risk of succumbing to its debt-load?

TOE’s level of debt is appropriate relative to its total equity, at 32.58%. This range is considered safe as TOE is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for TOE, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

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, 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 recommend you continue to research Toro Energy to get a better picture of the stock by looking at: