Shelf Drilling, Ltd. (OB:SHLF) is a small-cap stock with a market capitalization of øre4.3b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Energy Services industry, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SHLF here.
How does SHLF’s operating cash flow stack up against its debt?
SHLF’s debt level has been constant at around US$888m over the previous year which accounts for long term debt. At this stable level of debt, SHLF currently has US$67m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of SHLF’s operating efficiency ratios such as ROA here.
Can SHLF meet its short-term obligations with the cash in hand?
At the current liabilities level of US$109m, it appears that the company has been able to meet these obligations given the level of current assets of US$296m, with a current ratio of 2.72x. Generally, for Energy Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SHLF service its debt comfortably?
With total debt exceeding equities, SHLF is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since SHLF is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
SHLF’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 SHLF’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SHLF has company-specific issues impacting its capital structure decisions. I suggest you continue to research Shelf Drilling to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SHLF’s future growth? Take a look at our free research report of analyst consensus for SHLF’s outlook.
- Valuation: What is SHLF 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 SHLF is currently mispriced by the market.
- 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 editorial-team@simplywallst.com.