While small-cap stocks, such as Polo Resources Limited (AIM:POL) with its market cap of £11.85M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into POL here.
Does POL generate enough cash through operations?
POL has sustained its debt level by about $2.9M over the last 12 months , which is mainly comprised of near term debt. At this current level of debt, POL’s cash and short-term investments stands at $9.5M , ready to deploy into the business. However, 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. For this article’s sake, I won’t be looking at this today, but you can examine some of POL’s operating efficiency ratios such as ROA here.
Can POL meet its short-term obligations with the cash in hand?
At the current liabilities level of $3.2M liabilities, the company has been able to meet these commitments with a current assets level of $13.5M, leading to a 4.17x current account ratio. However, anything above 3x is considered high and could mean that POL has too much idle capital in low-earning investments.
Does POL face the risk of succumbing to its debt-load?POL’s level of debt is low relative to its total equity, at 6.23%. POL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is extremely low for POL, and the company also has the ability and headroom to increase debt if needed going forward.
Are you a shareholder? Although POL’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I recommend keeping abreast of market expectations for POL’s future growth on our free analysis platform.
Are you a potential investor? Polo Resources currently has financial flexibility to ramp up growth in the future. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also examine the company’s track record. As a following step, you should take a look at POL’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.