Is Magseis ASA's (OB:MSEIS) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Magseis ASA (OB:MSEIS), with a market cap of øre1.45b. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, even ones that are profitable, are more likely to be higher risk. So, understanding the company's financial health becomes 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 recommend you dig deeper yourself into MSEIS here.

Does MSEIS produce enough cash relative to debt?

MSEIS has shrunken its total debt levels in the last twelve months, from øre22.58m to øre16.30m , which comprises of short- and long-term debt. With this reduction in debt, MSEIS currently has øre29.96m remaining in cash and short-term investments for investing into the business. On top of this, MSEIS has generated cash from operations of øre24.16m over the same time period, leading to an operating cash to total debt ratio of 148.22%, signalling that MSEIS’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MSEIS’s case, it is able to generate 1.48x cash from its debt capital.

Can MSEIS pay its short-term liabilities?

Looking at MSEIS’s most recent øre15.46m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of øre49.13m, with a current ratio of 3.18x. Though, anything above 3x is considered high and could mean that MSEIS has too much idle capital in low-earning investments.

Can MSEIS service its debt comfortably?

MSEIS’s level of debt is appropriate relative to its total equity, at 11.48%. This range is considered safe as MSEIS is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether MSEIS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MSEIS's, case, the ratio of 11.54x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

MSEIS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. 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 MSEIS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Magseis to get a better picture of the stock by looking at:

1. 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.
2. Valuation: What is MSEIS 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 MSEIS 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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.