Secure Energy Services Inc. (TSE:SES) is a small-cap stock with a market capitalization of CA$1.4b. 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? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into SES here.
Does SES Produce Much Cash Relative To Its Debt?
SES’s debt levels surged from CA$311m to CA$430m over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$7.9m to keep the business going. Additionally, SES has generated cash from operations of CA$187m during the same period of time, resulting in an operating cash to total debt ratio of 43%, indicating that SES’s current level of operating cash is high enough to cover debt.
Can SES meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$178m, it seems that the business has been able to meet these obligations given the level of current assets of CA$331m, with a current ratio of 1.86x. The current ratio is calculated by dividing current assets by current liabilities. For Energy Services companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SES face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 51%, SES can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether SES is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SES’s, case, the ratio of 3.26x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SES’s high interest coverage is seen as responsible and safe practice.
Although SES’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SES’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Secure Energy Services to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SES’s future growth? Take a look at our free research report of analyst consensus for SES’s outlook.
- Valuation: What is SES 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 SES 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.