Revoil SA. (ATSE:REVOIL) is a small-cap stock with a market capitalization of €12.93M. 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? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into REVOIL here.
Does REVOIL generate an acceptable amount of cash through operations?
REVOIL has shrunken its total debt levels in the last twelve months, from €50.97M to €48.31M , which comprises of short- and long-term debt. With this debt payback, REVOIL currently has €6.15M remaining in cash and short-term investments , ready to deploy into the business. Moreover, REVOIL has produced cash from operations of €4.43M over the same time period, resulting in an operating cash to total debt ratio of 9.18%, signalling that REVOIL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In REVOIL’s case, it is able to generate 0.092x cash from its debt capital.
Does REVOIL’s liquid assets cover its short-term commitments?
At the current liabilities level of €89.52M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of €54.74M, leading to a 0.61x current account ratio. which is under the appropriate industry ratio of 3x.
Can REVOIL service its debt comfortably?Since total debt levels have outpaced equities, REVOIL is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since REVOIL is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
REVOIL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how REVOIL has been performing in the past. I recommend you continue to research Revoil to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has REVOIL’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.