While small-cap stocks, such as Orbit Garant Drilling Inc. (TSE:OGD) with its market cap of CA$63m, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into OGD here.
How does OGD’s operating cash flow stack up against its debt?
OGD has built up its total debt levels in the last twelve months, from CA$19m to CA$22m – this includes long-term debt. With this rise in debt, OGD’s cash and short-term investments stands at CA$4.2m , ready to deploy into the business. On top of this, OGD has produced cash from operations of CA$9.2m in the last twelve months, leading to an operating cash to total debt ratio of 42%, indicating that OGD’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OGD’s case, it is able to generate 0.42x cash from its debt capital.
Does OGD’s liquid assets cover its short-term commitments?
With current liabilities at CA$25m, it appears that the company has been able to meet these commitments with a current assets level of CA$81m, leading to a 3.18x current account ratio. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is OGD’s debt level acceptable?
With a debt-to-equity ratio of 27%, OGD’s debt level may be seen as prudent. This range is considered safe as OGD is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if OGD’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 OGD, the ratio of 2.44x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
OGD’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. I admit this is a fairly basic analysis for OGD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Orbit Garant Drilling to get a better picture of the stock by looking at:
- Historical Performance: What has OGD’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.
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 email@example.com.