Spectrum ASA (OB:SPU) is a small-cap stock with a market capitalization of ØRE2.59B. 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? Energy Services companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into SPU here.
How does SPU’s operating cash flow stack up against its debt?
SPU’s debt levels have fallen from US$43.25M to US$25.84M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, SPU’s cash and short-term investments stands at US$14.16M for investing into the business. Moreover, SPU has generated US$99.40M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 384.67%, indicating that SPU’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In SPU’s case, it is able to generate 3.85x cash from its debt capital.
Does SPU’s liquid assets cover its short-term commitments?
With current liabilities at US$81.70M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. For Energy Services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SPU face the risk of succumbing to its debt-load?SPU’s level of debt is appropriate relative to its total equity, at 17.15%. This range is considered safe as SPU is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with SPU, and the company has plenty of headroom and ability to raise debt should it need to in the future.
SPU’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how SPU has been performing in the past. I recommend you continue to research Spectrum to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPU’s future growth? Take a look at our free research report of analyst consensus for SPU’s outlook.
- Valuation: What is SPU 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 SPU 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.