Investors are always looking for growth in small-cap stocks like Cequence Energy Ltd (TSE:CQE), with a market cap of CA$17m. 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, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest 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 , which is mainly comprised of near term debt. At this stable level of debt, CQE currently has CA$4m remaining in cash and short-term investments for investing into the business. Additionally, CQE has generated cash from operations of CA$12m over the same time period, resulting in an operating cash to total debt ratio of 20%, meaning that CQE’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In CQE’s case, it is able to generate 0.2x cash from its debt capital.
Does CQE’s liquid assets cover its short-term commitments?
With current liabilities at CA$91m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.18x.
Is CQE’s debt level acceptable?
With debt reaching 41% of equity, CQE may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since CQE is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
CQE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure CQE has company-specific issues impacting its capital structure decisions. You should continue to research Cequence Energy to get a more holistic view of the stock by looking at:
- Valuation: What is CQE 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 CQE is currently mispriced by the market.
- 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.
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.
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