Investors are always looking for growth in small-cap stocks like Cequence Energy Ltd. (TSE:CQE), with a market cap of CA$13m. 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. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into CQE here.
How much cash does CQE generate through its operations?
CQE has sustained its debt level by about CA$60m over the last 12 months including long-term debt. At this constant level of debt, CQE’s cash and short-term investments stands at CA$14m for investing into the business. Additionally, CQE has produced CA$8.2m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 14%, signalling that CQE’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In CQE’s case, it is able to generate 0.14x cash from its debt capital.
Can CQE pay its short-term liabilities?
Looking at CQE’s CA$29m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.92x.
Can CQE service its debt comfortably?
CQE’s level of debt is appropriate relative to its total equity, at 38%. This range is considered safe as CQE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. CQE’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
CQE’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for CQE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Cequence Energy to get a better picture of the stock by looking at:
- Historical Performance: What has CQE’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.
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