While small-cap stocks, such as Eland Oil & Gas PLC (LON:ELA) with its market cap of UK£266m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes vital, 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, these checks don’t give you a full picture, so I suggest you dig deeper yourself into ELA here.
ELA’s Debt (And Cash Flows)
ELA’s debt levels surged from US$14m to US$25m over the last 12 months – this includes long-term debt. With this growth in debt, ELA currently has US$30m remaining in cash and short-term investments , ready to be used for running the business. On top of this, ELA has produced US$26m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 103%, signalling that ELA’s operating cash is sufficient to cover its debt.
Does ELA’s liquid assets cover its short-term commitments?
At the current liabilities level of US$91m, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$74m, leading to a current ratio of 0.81x. The current ratio is the number you get when you divide current assets by current liabilities.
Is ELA’s debt level acceptable?
With debt at 12% of equity, ELA may be thought of as appropriately levered. This range is considered safe as ELA is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether ELA 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 ELA’s, case, the ratio of 18.15x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
ELA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. This is only a rough assessment of financial health, and I’m sure ELA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Eland Oil & Gas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ELA’s future growth? Take a look at our free research report of analyst consensus for ELA’s outlook.
- Valuation: What is ELA 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 ELA 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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