While small-cap stocks, such as Laramide Resources Ltd (TSE:LAM) with its market cap of CA$53m, 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, 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. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into LAM here.
How much cash does LAM generate through its operations?
LAM has shrunken its total debt levels in the last twelve months, from CA$10m to CA$9m – this includes both the current and long-term debt. With this debt repayment, LAM’s cash and short-term investments stands at CA$3m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of LAM’s operating efficiency ratios such as ROA here.
Can LAM pay its short-term liabilities?
With current liabilities at CA$5m, it appears that the company may not be able to easily meet these obligations given the level of current assets of CA$3m, with a current ratio of 0.53x.
Is LAM’s debt level acceptable?
LAM’s level of debt is appropriate relative to its total equity, at 12%. This range is considered safe as LAM is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for LAM, and the company also has the ability and headroom to increase debt if needed going forward.
LAM’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. 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 LAM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Laramide Resources to get a better picture of the stock by looking at:
- Historical Performance: What has LAM’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.
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 email@example.com.