Are Obsidian Energy Ltd's (TSE:OBE) Interest Costs Too High?

While small-cap stocks, such as Obsidian Energy Ltd (TSE:OBE) with its market cap of CA$725.01m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into OBE here.

Does OBE produce enough cash relative to debt?

OBE has sustained its debt level by about CA$367.00m over the last 12 months made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at CA$2.00m for investing into the business. Additionally, OBE has generated cash from operations of CA$144.00m in the last twelve months, leading to an operating cash to total debt ratio of 39.24%, meaning that OBE’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In OBE’s case, it is able to generate 0.39x cash from its debt capital.

Does OBE’s liquid assets cover its short-term commitments?

At the current liabilities level of CA$306.00m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of CA$202.00m, with a current ratio of 0.66x below the prudent level of 3x.

Can OBE service its debt comfortably?

With a debt-to-equity ratio of 17.46%, OBE's debt level may be seen as prudent. This range is considered safe as OBE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors' risk associated with debt is very low with OBE, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

OBE’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, as shareholders, you should try and determine whether this level of debt is justified for OBE, especially when liquidity may also be an issue. I admit this is a fairly basic analysis for OBE's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Obsidian Energy to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for OBE’s future growth? Take a look at our free research report of analyst consensus for OBE’s outlook.
2. Valuation: What is OBE 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 OBE 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.