While small-cap stocks, such as Siem Offshore Inc (OB:SIOFF) with its market cap of ØRE2.05B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Energy Services industry, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into SIOFF here.
Does SIOFF generate enough cash through operations?
Over the past year, SIOFF has reduced its debt from US$1.55B to US$1.37B , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$63.51M for investing into the business. Additionally, SIOFF has produced cash from operations of US$107.63M during the same period of time, leading to an operating cash to total debt ratio of 7.87%, meaning that SIOFF’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In SIOFF’s case, it is able to generate 0.079x cash from its debt capital.
Can SIOFF pay its short-term liabilities?
Looking at SIOFF’s most recent US$224.82M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of US$187.66M, with a current ratio of 0.83x below the prudent level of 3x.
Can SIOFF service its debt comfortably?
With total debt exceeding equities, SIOFF 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. Though, since SIOFF 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.Next Steps:
SIOFF’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how SIOFF has been performing in the past. I recommend you continue to research Siem Offshore to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for SIOFF’s future growth? Take a look at our free research report of analyst consensus for SIOFF’s outlook.
- 2. Valuation: What is SIOFF 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 SIOFF is currently mispriced by the market.
- 3. 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.