While small-cap stocks, such as Magseis Fairfield ASA (OB:MSEIS) with its market cap of øre3.8b, 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 inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into MSEIS here.
How much cash does MSEIS generate through its operations?
MSEIS has shrunken its total debt levels in the last twelve months, from US$17m to US$14m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$34m for investing into the business. On top of this, MSEIS has generated US$7.0m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 50%, signalling that MSEIS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In MSEIS’s case, it is able to generate 0.5x cash from its debt capital.
Can MSEIS meet its short-term obligations with the cash in hand?
With current liabilities at US$16m, it seems that the business has been able to meet these obligations given the level of current assets of US$58m, with a current ratio of 3.55x. Having said that, a ratio greater than 3x may be considered high by some.
Can MSEIS service its debt comfortably?
With debt at 11% of equity, MSEIS may be thought of as appropriately levered. This range is considered safe as MSEIS is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for MSEIS, and the company also has the ability and headroom to increase debt if needed going forward.
MSEIS’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure MSEIS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Magseis Fairfield to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MSEIS’s future growth? Take a look at our free research report of analyst consensus for MSEIS’s outlook.
- Historical Performance: What has MSEIS’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.