While small-cap stocks, such as Toscana Energy Income Corporation (TSE:TEI) with its market cap of CA$3.17m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into TEI here.
How much cash does TEI generate through its operations?
TEI’s debt levels have fallen from CA$45.96m to CA$43.55m over the last 12 months , which is made up of current and long term debt. With this debt repayment, TEI currently has below CA$10K remaining in cash and short-term investment, which is rather low. However, TEI has generated CA$750.26k in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 1.72%, meaning that debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In TEI’s case, it is able to generate 0.017x cash from its debt capital.
Can TEI meet its short-term obligations with the cash in hand?
Looking at TEI’s most recent CA$49.68m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.1x, which is below the prudent industry ratio of 3x.
Can TEI service its debt comfortably?With total debt exceeding equities, TEI is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since TEI is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
TEI’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 TEI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Toscana Energy Income to get a better picture of the stock by looking at:
- Valuation: What is TEI 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 TEI is currently mispriced by the market.
- Historical Performance: What has TEI’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.