OPG Power Ventures PLC (LON:OPG): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like OPG Power Ventures PLC (LON:OPG), with a market cap of UK£57.37m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into OPG here.

How much cash does OPG generate through its operations?

OPG’s debt levels surged from UK£281.98m to UK£298.82m over the last 12 months , which is made up of current and long term debt. With this growth in debt, OPG’s cash and short-term investments stands at UK£8.49m , ready to deploy into the business. On top of this, OPG has generated cash from operations of UK£41.53m over the same time period, leading to an operating cash to total debt ratio of 13.90%, signalling that OPG’s current level of operating cash is not 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 0.14x cash from its debt capital.

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

Looking at OPG’s most recent UK£118.81m liabilities, the company has been able to meet these obligations given the level of current assets of UK£134.84m, with a current ratio of 1.13x. For Electric Utilities companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

AIM:OPG Historical Debt August 9th 18
AIM:OPG Historical Debt August 9th 18

Can OPG service its debt comfortably?

Since total debt levels have outpaced equities, OPG is a highly 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 check to see whether OPG 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 OPG’s, case, the ratio of 0.98x 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 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. 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 more holistic view of the stock by looking at:

  1. 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.
  2. 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.
  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.