While small-cap stocks, such as Inplay Oil Corp (TSE:IPO) with its market cap of CA$116.76m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into IPO here.
How much cash does IPO generate through its operations?
IPO’s debt levels surged from CA$35.79m to CA$45.91m over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$800.00k for investing into the business. On top of this, IPO has generated CA$23.78m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 51.79%, indicating that IPO’s operating cash is sufficient to cover its 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 IPO’s case, it is able to generate 0.52x cash from its debt capital.
Can IPO meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$24.79m liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.55x, which is below the prudent industry ratio of 3x.
Is IPO’s debt level acceptable?With a debt-to-equity ratio of 23.93%, IPO’s debt level may be seen as prudent. This range is considered safe as IPO is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for IPO, and the company also has the ability and headroom to increase debt if needed going forward.
IPO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for IPO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Inplay Oil to get a better picture of the stock by looking at:
- 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.
- 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.
- 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.