While small-cap stocks, such as Shelf Drilling Ltd (OB:SHLF) with its market cap of US$6.54b, 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, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into SHLF here.
How much cash does SHLF generate through its operations?
SHLF’s debt levels surged from US$767.91m to US$921.26m over the last 12 months , which is made up of current and long term debt. With this growth in debt, SHLF currently has US$120.60m remaining in cash and short-term investments for investing into the business. Moreover, SHLF has produced cash from operations of US$29.16m over the same time period, resulting in an operating cash to total debt ratio of 3.17%, meaning that SHLF’s operating cash is not sufficient to cover its debt. 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 positive earnings. In SHLF’s case, it is able to generate 0.032x cash from its debt capital.
Does SHLF’s liquid assets cover its short-term commitments?
Looking at SHLF’s most recent US$161.60m liabilities, the company has been able to meet these commitments with a current assets level of US$347.54m, leading to a 2.15x current account ratio. Generally, for Energy Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does SHLF face the risk of succumbing to its debt-load?Since total debt levels have outpaced equities, SHLF is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SHLF is currently loss-making, 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.
SHLF’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for SHLF’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Shelf Drilling to get a better picture of the stock by looking at:
- Historical Performance: What has SHLF’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.