NexGen Energy Ltd (TSE:NXE) is a small-cap stock with a market capitalization of CA$912.17m. 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? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into NXE here.
How does NXE’s operating cash flow stack up against its debt?
NXE’s debt levels surged from CA$82.70m to CA$150.67m over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, NXE’s cash and short-term investments stands at CA$142.93m , ready to deploy 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of NXE’s operating efficiency ratios such as ROA here.
Can NXE pay its short-term liabilities?
Looking at NXE’s most recent CA$3.98m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 36.16x. However, a ratio greater than 3x may be considered as too high, as NXE could be holding too much capital in a low-return investment environment.
Is NXE’s debt level acceptable?NXE is a relatively highly levered company with a debt-to-equity of 88.65%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since NXE is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, NXE has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure NXE has company-specific issues impacting its capital structure decisions. I suggest you continue to research NexGen Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NXE’s future growth? Take a look at our free research report of analyst consensus for NXE’s outlook.
- Historical Performance: What has NXE’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.
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