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Athabasca Oil Corporation (TSE:ATH) is a small-cap stock with a market capitalization of CA$500m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ATH here.
How does ATH’s operating cash flow stack up against its debt?
Over the past year, ATH has maintained its debt levels at around CA$547m – this includes long-term debt. At this stable level of debt, ATH currently has CA$128m remaining in cash and short-term investments for investing into the business. Additionally, ATH has produced cash from operations of CA$123m in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that ATH’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In ATH’s case, it is able to generate 0.23x cash from its debt capital.
Can ATH meet its short-term obligations with the cash in hand?
With current liabilities at CA$163m, it appears that the company has been able to meet these obligations given the level of current assets of CA$377m, with a current ratio of 2.32x. Usually, for Oil and Gas companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ATH face the risk of succumbing to its debt-load?
With debt at 38% of equity, ATH may be thought of as appropriately levered. ATH is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for ATH, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
ATH has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, 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 ATH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Athabasca Oil to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATH’s future growth? Take a look at our free research report of analyst consensus for ATH’s outlook.
- Valuation: What is ATH 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 ATH is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.