OPG Power Ventures Plc (LON:OPG) is a small-cap stock with a market capitalization of UK£59m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into OPG here.
How does OPG’s operating cash flow stack up against its debt?
Over the past year, OPG has reduced its debt from UK£299m to UK£86m – this includes long-term debt. With this debt repayment, OPG’s cash and short-term investments stands at UK£798k , ready to deploy into the business. Additionally, OPG has produced UK£66m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 77%, indicating that OPG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OPG’s case, it is able to generate 0.77x cash from its debt capital.
Does OPG’s liquid assets cover its short-term commitments?
Looking at OPG’s UK£77m in current liabilities, the company has been able to meet these obligations given the level of current assets of UK£82m, with a current ratio of 1.06x. Generally, for Electric Utilities companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can OPG service its debt comfortably?
With a debt-to-equity ratio of 61%, OPG can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if OPG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For OPG, the ratio of 1.91x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
OPG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how OPG has been performing in the past. I recommend you continue to research OPG Power Ventures to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OPG’s future growth? Take a look at our free research report of analyst consensus for OPG’s outlook.
- Valuation: What is OPG 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 OPG 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.
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.