Savannah Petroleum Plc (LON:SAVP): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like Savannah Petroleum Plc (AIM:SAVP), with a market cap of UK£235.29M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into SAVP here.

Does SAVP generate an acceptable amount of cash through operations?

In the previous 12 months, SAVP's rose by about US$12.68M . With this ramp up in debt, SAVP's cash and short-term investments stands at US$14.90M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of SAVP’s operating efficiency ratios such as ROA here.

Can SAVP meet its short-term obligations with the cash in hand?

At the current liabilities level of US$30.57M liabilities, the company is not able to meet these obligations given the level of current assets of US$18.90M, with a current ratio of 0.62x below the prudent level of 3x.

Can SAVP service its debt comfortably?

With debt at 12.31% of equity, SAVP may be thought of as appropriately levered. This range is considered safe as SAVP is not taking on too much debt obligation, which may be constraining for future growth. SAVP's risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

SAVP’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for SAVP's financial health. Other important fundamentals need to be considered alongside. You should continue to research Savannah Petroleum to get a better picture of the stock by looking at:

• 1. Historical Performance: What has SAVP'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.