Is Eidesvik Offshore ASA's (OB:EIOF) Balance Sheet A Threat To Its Future?

Eidesvik Offshore ASA (OB:EIOF) is a small-cap stock with a market capitalization of ØRE363.58M. 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? Energy Services companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into EIOF here.

Does EIOF generate enough cash through operations?

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 reduction in debt, EIOF's cash and short-term investments stands at ØRE557.44M for investing into the business. On top of this, EIOF has produced cash from operations of ØRE362.55M during the same period of time, resulting in an operating cash to total debt ratio of 13.86%, meaning that EIOF’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EIOF’s case, it is able to generate 0.14x cash from its debt capital.

Can EIOF meet its short-term obligations with the cash in hand?

With current liabilities at ØRE469.77M, it seems that the business has been able to meet these obligations given the level of current assets of ØRE734.41M, with a current ratio of 1.56x. Usually, for Energy Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can EIOF service its debt comfortably?

Since total debt levels have outpaced equities, EIOF is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.

Next Steps:

EIOF’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. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how EIOF has been performing in the past. I suggest you continue to research Eidesvik Offshore to get a more holistic view of the stock by looking at:

• 1. 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.
• 2. 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.
• 3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.