Is SouthGobi Resources Ltd (TSE:SGQ) A Financially Sound Company?

SouthGobi Resources Ltd (TSX:SGQ) is a small-cap stock with a market capitalization of CA$44.98M. 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? Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into SGQ here.

Does SGQ generate enough cash through operations?

SGQ’s debt levels surged from US$117.56M to US$126.47M over the last 12 months , which is made up of current and long term debt. With this increase in debt, SGQ currently has US$966.00K remaining in cash and short-term investments , ready to deploy into the business. Additionally, SGQ has produced cash from operations of US$2.76M during the same period of time, resulting in an operating cash to total debt ratio of 2.18%, meaning that SGQ’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In SGQ’s case, it is able to generate 0.022x cash from its debt capital.

Can SGQ meet its short-term obligations with the cash in hand?

With current liabilities at US$116.60M, the company has not been able to meet these commitments with a current assets level of US$57.18M, leading to a 0.49x current account ratio. which is under the appropriate industry ratio of 3x.

TSX:SGQ Historical Debt Mar 20th 18
TSX:SGQ Historical Debt Mar 20th 18

Can SGQ service its debt comfortably?

SGQ is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SGQ 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.

Next Steps:

SGQ’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for SGQ’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research SouthGobi Resources to get a better picture of the stock by looking at: