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Condor Petroleum Inc. (TSE:CPI) is a small-cap stock with a market capitalization of CA$8.8m. 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, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into CPI here.
How does CPI’s operating cash flow stack up against its debt?
CPI’s debt levels have fallen from CA$13m to CA$8.7m over the last 12 months , which also accounts for long term debt. With this reduction in debt, CPI’s cash and short-term investments stands at CA$1.4m , ready to deploy into the business. On top of this, CPI has produced CA$4.1m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 47%, indicating that CPI’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 a positive net income. In CPI’s case, it is able to generate 0.47x cash from its debt capital.
Can CPI pay its short-term liabilities?
At the current liabilities level of CA$8.4m, the company may not be able to easily meet these obligations given the level of current assets of CA$6.1m, with a current ratio of 0.72x.
Is CPI’s debt level acceptable?
CPI’s level of debt is appropriate relative to its total equity, at 25%. This range is considered safe as CPI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for CPI, and the company also has the ability and headroom to increase debt if needed going forward.
CPI’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure CPI has company-specific issues impacting its capital structure decisions. You should continue to research Condor Petroleum to get a better picture of the stock by looking at:
- Historical Performance: What has CPI’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.
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 email@example.com.