While small-cap stocks, such as Oceanteam ASA (OB:OTS) with its market cap of øre277m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that OTS is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into OTS here.
Does OTS Produce Much Cash Relative To Its Debt?
OTS has shrunk its total debt levels in the last twelve months, from US$77m to US$39m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$9.4m to keep the business going. Moreover, OTS has generated cash from operations of US$3.7m over the same time period, resulting in an operating cash to total debt ratio of 9.5%, signalling that OTS’s operating cash is less than its debt.
Can OTS pay its short-term liabilities?
At the current liabilities level of US$45m, it seems that the business 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. The current ratio is the number you get when you divide current assets by current liabilities.
Is OTS’s debt level acceptable?
With a debt-to-equity ratio of 50%, OTS can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since OTS is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure OTS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Oceanteam to get a better picture of the stock by looking at:
- Valuation: What is OTS 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 OTS is currently mispriced by the market.
- 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.
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