Is Inplay Oil Corp (TSE:IPO) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Inplay Oil Corp (TSE:IPO), with a market cap of CA$90m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into IPO here.

How does IPO’s operating cash flow stack up against its debt?

IPO’s debt levels surged from CA$35m to CA$52m over the last 12 months , which is made up of current and long term debt. With this increase in debt, IPO’s cash and short-term investments stands at CA$70k , ready to deploy into the business. Additionally, IPO has generated CA$24m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 47%, meaning that IPO’s operating cash is sufficient to cover its debt. 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 positive earnings. In IPO’s case, it is able to generate 0.47x cash from its debt capital.

Can IPO pay its short-term liabilities?

With current liabilities at CA$22m, it seems that the business may not have an easy time meeting these commitments with a current assets level of CA$12m, leading to a current ratio of 0.56x.

TSX:IPO Historical Debt November 12th 18
TSX:IPO Historical Debt November 12th 18

Can IPO service its debt comfortably?

IPO’s level of debt is appropriate relative to its total equity, at 27%. IPO is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with IPO, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

IPO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, 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 IPO has been performing in the past. I recommend you continue to research Inplay Oil to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for IPO’s future growth? Take a look at our free research report of analyst consensus for IPO’s outlook.
  2. Valuation: What is IPO 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 IPO is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.