Is Ur-Energy Inc.’s (TSE:URE) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as Ur-Energy Inc. (TSE:URE) with its market cap of CA$145m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into URE here.

Does URE produce enough cash relative to debt?

URE has shrunken its total debt levels in the last twelve months, from US$21m to US$16m , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$12m for investing into the business. Additionally, URE has produced US$1.2m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 7.3%, indicating that URE’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In URE’s case, it is able to generate 0.073x cash from its debt capital.

Can URE pay its short-term liabilities?

At the current liabilities level of US$7.9m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

TSX:URE Historical Debt December 15th 18
TSX:URE Historical Debt December 15th 18

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

With debt at 30% of equity, URE may be thought of as appropriately levered. This range is considered safe as URE is not taking on too much debt obligation, which may be constraining for future growth. We can test if URE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For URE, the ratio of 0.26x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as URE’s low interest coverage already puts the company at higher risk of default.

Next Steps:

URE’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure URE has company-specific issues impacting its capital structure decisions. You should continue to research Ur-Energy to get a better picture of the stock by looking at:

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.