What does Seven Generations Energy Ltd.'s (TSE:VII) Balance Sheet Tell Us About Its Future?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Seven Generations Energy Ltd. (TSE:VII), with a market cap of CA$3.5b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. VII’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into VII here.
See our latest analysis for Seven Generations Energy
VII’s Debt (And Cash Flows)
VII's debt levels surged from CA$2.0b to CA$2.1b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$102m to keep the business going. Additionally, VII has produced CA$1.8b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 84%, meaning that VII’s current level of operating cash is high enough to cover debt.
Can VII pay its short-term liabilities?
At the current liabilities level of CA$410m, the company has been able to meet these obligations given the level of current assets of CA$423m, with a current ratio of 1.03x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can VII service its debt comfortably?
With debt reaching 44% of equity, VII may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In VII's case, the ratio of 8.3x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving VII ample headroom to grow its debt facilities.
Next Steps:
Although VII’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around VII's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VII's financial health. Other important fundamentals need to be considered alongside. You should continue to research Seven Generations Energy to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VII’s future growth? Take a look at our free research report of analyst consensus for VII’s outlook.
- Valuation: What is VII 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 VII is currently mispriced by the market.
- 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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