Is Odfjell Drilling Ltd.’s (OB:ODL) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Odfjell Drilling Ltd. (OB:ODL), with a market cap of øre6.8b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into ODL here.

Does ODL Produce Much Cash Relative To Its Debt?

Over the past year, ODL has reduced its debt from US$1.2b to US$1.1b – this includes long-term debt. With this reduction in debt, ODL currently has US$175m remaining in cash and short-term investments to keep the business going. Moreover, ODL has produced cash from operations of US$221m in the last twelve months, leading to an operating cash to total debt ratio of 20%, meaning that ODL’s current level of operating cash is high enough to cover debt.

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

At the current liabilities level of US$931m, the company may not be able to easily meet these obligations given the level of current assets of US$316m, with a current ratio of 0.34x. The current ratio is the number you get when you divide current assets by current liabilities.

OB:ODL Historical Debt, April 23rd 2019
OB:ODL Historical Debt, April 23rd 2019

Does ODL face the risk of succumbing to its debt-load?

With total debt exceeding equity, ODL is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if ODL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ODL, the ratio of 1.46x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although ODL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for ODL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Odfjell Drilling to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ODL’s future growth? Take a look at our free research report of analyst consensus for ODL’s outlook.
  2. Valuation: What is ODL 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 ODL 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.

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.

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