While small-cap stocks, such as Awilco Drilling PLC (OB:AWDR) with its market cap of US$2.34b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Energy Services industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into AWDR here.
Does AWDR produce enough cash relative to debt?
AWDR has shrunken its total debt levels in the last twelve months, from US$100.00m to US$90.00m , which is made up of current and long term debt. With this reduction in debt, AWDR’s cash and short-term investments stands at US$92.47m for investing into the business. On top of this, AWDR has generated US$79.53m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 88.37%, meaning that AWDR’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 AWDR’s case, it is able to generate 0.88x cash from its debt capital.
Can AWDR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$21.38m liabilities, the company has been able to meet these obligations given the level of current assets of US$190.19m, with a current ratio of 8.9x. Though, anything about 3x may be excessive, since AWDR may be leaving too much capital in low-earning investments.
Does AWDR face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 29.20%, AWDR’s debt level may be seen as prudent. AWDR is not taking on too much debt commitment, which may be constraining for future growth. We can test if AWDR’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 AWDR, the ratio of 14.49x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AWDR ample headroom to grow its debt facilities.
AWDR’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, 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 AWDR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Awilco Drilling to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AWDR’s future growth? Take a look at our free research report of analyst consensus for AWDR’s outlook.
- Historical Performance: What has AWDR’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.
- 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 email@example.com.