While small-cap stocks, such as DOF ASA (OB:DOF) with its market cap of øre2.43b, 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, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into DOF here.
How does DOF’s operating cash flow stack up against its debt?
DOF has sustained its debt level by about øre19.24b over the last 12 months comprising of short- and long-term debt. At this stable level of debt, DOF’s cash and short-term investments stands at øre1.85b , ready to deploy into the business. On top of this, DOF has generated cash from operations of øre746.00m in the last twelve months, resulting in an operating cash to total debt ratio of 3.88%, signalling that DOF’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In DOF’s case, it is able to generate 0.039x cash from its debt capital.
Can DOF pay its short-term liabilities?
Looking at DOF’s most recent øre3.65b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. Generally, for Energy Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is DOF’s debt level acceptable?With total debt exceeding equities, DOF is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since DOF is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
At its current level of cash flow coverage, DOF has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for DOF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research DOF to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DOF’s future growth? Take a look at our free research report of analyst consensus for DOF’s outlook.
- Valuation: What is DOF 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 DOF 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.