While small-cap stocks, such as Cequence Energy Ltd (TSE:CQE) with its market cap of CA$15.96m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into CQE here.
How does CQE’s operating cash flow stack up against its debt?
CQE has sustained its debt level by about CA$59.34m over the last 12 months comprising of short- and long-term debt. At this stable level of debt, CQE currently has CA$11.49m remaining in cash and short-term investments , ready to deploy into the business. Moreover, CQE has produced cash from operations of CA$19.88m in the last twelve months, resulting in an operating cash to total debt ratio of 33.51%, meaning that CQE’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 CQE’s case, it is able to generate 0.34x cash from its debt capital.
Does CQE’s liquid assets cover its short-term commitments?
Looking at CQE’s most recent CA$95.06m liabilities, the company has not been able to meet these commitments with a current assets level of CA$27.50m, leading to a 0.29x current account ratio. which is under the appropriate industry ratio of 3x.
Can CQE service its debt comfortably?With a debt-to-equity ratio of 39.95%, CQE’s debt level may be seen as prudent. 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 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how CQE has been performing in the past. I suggest you continue to research Cequence Energy to get a better picture 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.