Is Cathedral Energy Services Ltd's (TSE:CET) Balance Sheet Strong Enough To Weather A Storm?

Cathedral Energy Services Ltd (TSE:CET) is a small-cap stock with a market capitalization of CA$57.35m. 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? Energy Services companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into CET here.

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

Over the past year, CET has reduced its debt from CA$28.89m to CA$1.51m , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CA$2.68m , ready to deploy into the business. On top of this, CET has generated cash from operations of CA$2.95m during the same period of time, leading to an operating cash to total debt ratio of 195.24%, indicating that CET’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In CET’s case, it is able to generate 1.95x cash from its debt capital.

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

With current liabilities at CA$19.74m, it seems that the business has been able to meet these commitments with a current assets level of CA$50.76m, leading to a 2.57x current account ratio. For Energy Services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is CET’s debt level acceptable?

With debt at 3.50% of equity, CET may be thought of as having low leverage. This range is considered safe as CET is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. CET's risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

CET’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure CET has company-specific issues impacting its capital structure decisions. You should continue to research Cathedral Energy Services to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for CET’s future growth? Take a look at our free research report of analyst consensus for CET’s outlook.
2. Valuation: What is CET 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 CET is currently mispriced by the market.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.