Investors are always looking for growth in small-cap stocks like Reach Subsea ASA (OB:REACH), with a market cap of øre336m. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, in particular ones that run negative earnings, are more likely to be higher 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into REACH here.
How much cash does REACH generate through its operations?
REACH has built up its total debt levels in the last twelve months, from øre69m to øre190m , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at øre69m for investing into the business. On top of this, REACH has produced øre226m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 119%, indicating that REACH’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In REACH’s case, it is able to generate 1.19x cash from its debt capital.
Does REACH’s liquid assets cover its short-term commitments?
With current liabilities at øre251m, the company has been able to meet these obligations given the level of current assets of øre275m, with a current ratio of 1.1x. Usually, for Energy Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does REACH face the risk of succumbing to its debt-load?
REACH is a relatively highly levered company with a debt-to-equity of 89%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since REACH is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
REACH’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around REACH’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for REACH’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Reach Subsea to get a more holistic view of the small-cap by looking at:
- Valuation: What is REACH 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 REACH is currently mispriced by the market.
- Historical Performance: What has REACH’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.