Frontera Energy Corporation (TSE:FEC) is a small-cap stock with a market capitalization of CA$1.2b. 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? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into FEC here.
Does FEC produce enough cash relative to debt?
Over the past year, FEC has ramped up its debt from US$270m to US$352m – this includes long-term debt. With this growth in debt, FEC currently has US$587m remaining in cash and short-term investments for investing into the business. On top of this, FEC has generated cash from operations of US$495m over the same time period, leading to an operating cash to total debt ratio of 140%, meaning that FEC’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In FEC’s case, it is able to generate 1.4x cash from its debt capital.
Can FEC pay its short-term liabilities?
With current liabilities at US$700m, it appears that the company has been able to meet these commitments with a current assets level of US$1.0b, leading to a 1.47x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FEC service its debt comfortably?
With debt at 27% of equity, FEC may be thought of as appropriately levered. This range is considered safe as FEC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. FEC’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.
FEC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how FEC has been performing in the past. I suggest you continue to research Frontera Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FEC’s future growth? Take a look at our free research report of analyst consensus for FEC’s outlook.
- Valuation: What is FEC 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 FEC is currently mispriced by the market.
- 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 firstname.lastname@example.org.