While small-cap stocks, such as Toscana Energy Income Corporation (TSX:TEI) with its market cap of CA$3.10M, 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, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis 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.
Does TEI generate enough cash through 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 payback, the current cash and short-term investment levels stands at under CA$10K, which is rather low. Though TEI has generated cash from operations of CA$750.26K over the same time period, resulting in an operating cash to total debt ratio of 1.72%, indicating 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 pay its short-term liabilities?
Looking at TEI’s most recent CA$49.68M liabilities, the company is not able to meet these obligations given the level of current assets of CA$5.03M, with a current ratio of 0.1x below the prudent level of 3x.
Can TEI service its debt comfortably?TEI is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since TEI is presently unprofitable, 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.
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 more holistic view 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.