Investors are always looking for growth in small-cap stocks like Zargon Oil & Gas Ltd (TSX:ZAR), with a market cap of CA$12.32M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes 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 ZAR here.
How does ZAR’s operating cash flow stack up against its debt?
Over the past year, ZAR has reduced its debt from CA$56.67M to CA$41.46M , which is made up of current and long term debt. With this reduction in debt, ZAR currently has CA$6.00M remaining in cash and short-term investments , ready to deploy into the business. Moreover, ZAR has generated CA$2.48M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 5.99%, signalling that ZAR’s current level of operating cash is not high enough to cover debt. 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 ZAR’s case, it is able to generate 0.06x cash from its debt capital.
Can ZAR pay its short-term liabilities?
With current liabilities at CA$7.51M, it seems that the business has been able to meet these commitments with a current assets level of CA$9.89M, leading to a 1.32x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can ZAR service its debt comfortably?ZAR is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ZAR is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ZAR’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ZAR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Zargon Oil & Gas to get a better picture of the stock by looking at:
- 1. Valuation: What is ZAR 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 ZAR is currently mispriced by the market.
- 2. Historical Performance: What has ZAR’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.
- 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.