Is TORC Oil & Gas Ltd.'s (TSE:TOG) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as TORC Oil & Gas Ltd. (TSE:TOG) with its market cap of CA$988m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into TOG here.

Does TOG Produce Much Cash Relative To Its Debt?

TOG has built up its total debt levels in the last twelve months, from CA$243m to CA$335m , which includes long-term debt. With this increase in debt, TOG currently has CA$3.5m remaining in cash and short-term investments , ready to be used for running the business. Moreover, TOG has produced cash from operations of CA$294m during the same period of time, resulting in an operating cash to total debt ratio of 88%, signalling that TOG’s operating cash is sufficient to cover its debt.

Can TOG pay its short-term liabilities?

With current liabilities at CA$103m, the company may not have an easy time meeting these commitments with a current assets level of CA$34m, leading to a current ratio of 0.33x. The current ratio is the number you get when you divide current assets by current liabilities.

Does TOG face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 22%, TOG's debt level may be seen as prudent. TOG is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether TOG 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 TOG's, case, the ratio of 5.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TOG ample headroom to grow its debt facilities.

Next Steps:

TOG’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for TOG's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research TORC Oil & Gas to get a more holistic view of the stock by looking at:

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