Advantage Oil & Gas Ltd (TSE:AAV): Time For A Financial Health Check

While small-cap stocks, such as Advantage Oil & Gas Ltd (TSX:AAV) with its market cap of CA$714.10M, 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, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AAV here.

Does AAV generate enough cash through operations?

AAV’s debt levels surged from CA$153.10M to CA$208.98M over the last 12 months , which is made up of current and long term debt. With this increase in debt, AAV currently has CA$6.92M remaining in cash and short-term investments , ready to deploy into the business. On top of this, AAV has produced CA$186.40M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 89.20%, meaning that AAV’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AAV’s case, it is able to generate 0.89x cash from its debt capital.

Does AAV’s liquid assets cover its short-term commitments?

Looking at AAV’s most recent CA$51.12M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CA$70.29M, with a current ratio of 1.38x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

TSX:AAV Historical Debt Mar 8th 18
TSX:AAV Historical Debt Mar 8th 18

Is AAV’s debt level acceptable?

With debt at 15.93% of equity, AAV may be thought of as appropriately levered. AAV is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if AAV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AAV, the ratio of 17.75x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

AAV’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure AAV has company-specific issues impacting its capital structure decisions. I recommend you continue to research Advantage Oil & Gas to get a more holistic view of the stock by looking at: