Investors are always looking for growth in small-cap stocks like MEG Energy Corp (TSE:MEG), with a market cap of CA$2.49b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MEG here.
How much cash does MEG generate through its operations?
Over the past year, MEG has reduced its debt from CA$4.84b to CA$3.62b – this includes both the current and long-term debt. With this debt repayment, MEG currently has CA$564.0m remaining in cash and short-term investments , ready to deploy into the business. On top of this, MEG has generated CA$391.8m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 10.8%, signalling that MEG’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MEG’s case, it is able to generate 0.11x cash from its debt capital.
Does MEG’s liquid assets cover its short-term commitments?
With current liabilities at CA$679.3m, it appears that the company has been able to meet these commitments with a current assets level of CA$890.4m, leading to a 1.31x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does MEG face the risk of succumbing to its debt-load?
With debt reaching 91.8% of equity, MEG may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.Next Steps:
MEG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how MEG has been performing in the past. I recommend you continue to research MEG Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MEG’s future growth? Take a look at our free research report of analyst consensus for MEG’s outlook.
- Valuation: What is MEG 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 MEG 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 editorial-team@simplywallst.com.