While small-cap stocks, such as Oceanteam ASA (OB:OTS) with its market cap of øre288m, 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, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into OTS here.
How much cash does OTS generate through its operations?
Over the past year, OTS has reduced its debt from US$77m to US$39m , which also accounts for long term debt. With this reduction in debt, OTS’s cash and short-term investments stands at US$9.4m for investing into the business. Additionally, OTS has generated US$3.7m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 9.5%, indicating that OTS’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In OTS’s case, it is able to generate 0.095x cash from its debt capital.
Does OTS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$45m, the company may not have an easy time meeting these commitments with a current assets level of US$16m, leading to a current ratio of 0.37x.
Can OTS service its debt comfortably?
OTS is a relatively highly levered company with a debt-to-equity of 50%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since OTS is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although OTS’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. But, 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 OTS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Oceanteam to get a more holistic view of the stock by looking at:
- Historical Performance: What has OTS’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.