While small-cap stocks, such as Spectrum ASA (OB:SPU) with its market cap of US$3.38b, 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. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into SPU here.
How does SPU’s operating cash flow stack up against its debt?
SPU has shrunken its total debt levels in the last twelve months, from US$35.07m to US$23.72m , which is made up of current and long term debt. With this debt payback, SPU’s cash and short-term investments stands at US$20.12m for investing into the business. On top of this, SPU has produced US$92.46m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 389.78%, signalling that SPU’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SPU’s case, it is able to generate 3.9x cash from its debt capital.
Can SPU meet its short-term obligations with the cash in hand?
With current liabilities at US$96.41m, it appears that the company is not able to meet these obligations given the level of current assets of US$75.58m, with a current ratio of 0.78x below the prudent level of 3x.
Can SPU service its debt comfortably?SPU’s level of debt is appropriate relative to its total equity, at 17.15%. SPU is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for SPU, and the company also has the ability and headroom to increase debt if needed going forward.
SPU has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for SPU, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven’t considered other factors such as how SPU has been performing in the past. You should 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.