While small-cap stocks, such as Archer Limited (OB:ARCHER) with its market cap of øre1.48b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, even ones that are profitable, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into ARCHER here.
How much cash does ARCHER generate through its operations?
ARCHER has shrunken its total debt levels in the last twelve months, from øre823.20m to øre662.20m , which comprises of short- and long-term debt. With this debt payback, ARCHER currently has øre59.00m remaining in cash and short-term investments for investing into the business. On top of this, ARCHER has generated øre13.40m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 2.02%, meaning that ARCHER’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARCHER’s case, it is able to generate 0.02x cash from its debt capital.
Does ARCHER’s liquid assets cover its short-term commitments?
With current liabilities at øre177.80m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.7x. For Energy Services 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.
Is ARCHER’s debt level acceptable?ARCHER is a highly-leveraged company with debt exceeding equity by over 100%. 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 ARCHER 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 ARCHER’s, case, the ratio of less than 0.1x suggests is not appropriately covered lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
ARCHER’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure ARCHER has company-specific issues impacting its capital structure decisions. You should continue to research Archer to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARCHER’s future growth? Take a look at our free research report of analyst consensus for ARCHER’s outlook.
- Valuation: What is ARCHER 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 ARCHER 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.