Seplat Petroleum Development Company Plc (LON:SEPL): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like Seplat Petroleum Development Company Plc (LON:SEPL), with a market cap of UK£709m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SEPL here.

How much cash does SEPL generate through its operations?

SEPL's debt levels have fallen from US$612m to US$537m over the last 12 months , which also accounts for long term debt. With this debt repayment, SEPL's cash and short-term investments stands at US$634m , ready to deploy into the business. On top of this, SEPL has produced US$666m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 124%, indicating that SEPL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SEPL’s case, it is able to generate 1.24x cash from its debt capital.

Can SEPL pay its short-term liabilities?

Looking at SEPL’s US$298m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.09x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

Does SEPL face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 34%, SEPL's debt level may be seen as prudent. SEPL is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether SEPL 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 SEPL's, case, the ratio of 5.22x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SEPL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SEPL’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how SEPL has been performing in the past. You should continue to research Seplat Petroleum Development to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SEPL’s future growth? Take a look at our free research report of analyst consensus for SEPL’s outlook.
2. Valuation: What is SEPL 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 SEPL is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.

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.