While small-cap stocks, such as Eidesvik Offshore ASA (OB:EIOF) with its market cap of øre385.33m, 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, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into EIOF here.
How does EIOF’s operating cash flow stack up against its debt?
Over the past year, EIOF has reduced its debt from øre3.46b to øre2.61b – this includes both the current and long-term debt. With this debt repayment, EIOF’s cash and short-term investments stands at øre557.47m , ready to deploy into the business. Additionally, EIOF has generated øre352.53m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13.48%, indicating that EIOF’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In EIOF’s case, it is able to generate 0.13x cash from its debt capital.
Can EIOF pay its short-term liabilities?
Looking at EIOF’s most recent øre469.77m liabilities, it seems that the business has been able to meet these commitments with a current assets level of øre734.41m, leading to a 1.56x current account ratio. For Energy Services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is EIOF’s debt level acceptable?
With total debt exceeding equities, EIOF is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since EIOF is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.Next Steps:
EIOF’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 EIOF has been performing in the past. I recommend you continue to research Eidesvik Offshore to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EIOF’s future growth? Take a look at our free research report of analyst consensus for EIOF’s outlook.
- Valuation: What is EIOF 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 EIOF 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.