What does Empyrean Energy Plc's (LON:EME) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as Empyrean Energy Plc (AIM:EME) with its market cap of UK£54.44M, 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, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company's financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into EME here.

How does EME’s operating cash flow stack up against its debt?

EME's debt levels surged from US$195.00K to US$459.00K over the last 12 months made up of predominantly near term debt. With this growth in debt, EME's cash and short-term investments stands at US$6.11M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of EME’s operating efficiency ratios such as ROA here.

Can EME pay its short-term liabilities?

With current liabilities at US$2.66M, it seems that the business has been able to meet these commitments with a current assets level of US$7.27M, leading to a 2.73x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can EME service its debt comfortably?

With debt reaching 54.97% of equity, EME may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since EME is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

EME’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. This is only a rough assessment of financial health, and I'm sure EME has company-specific issues impacting its capital structure decisions. You should continue to research Empyrean Energy to get a more holistic view of the stock by looking at:

• 1. Historical Performance: What has EME'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.
• 2. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.