Is Carrizo Oil & Gas, Inc.’s (NASDAQ:CRZO) Balance Sheet A Threat To Its Future?

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While small-cap stocks, such as Carrizo Oil & Gas, Inc. (NASDAQ:CRZO) with its market cap of US$960m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into CRZO here.

Does CRZO Produce Much Cash Relative To Its Debt?

CRZO’s debt levels surged from US$1.4b to US$1.8b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$2.2m to keep the business going. Moreover, CRZO has generated US$640m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 36%, indicating that CRZO’s debt is appropriately covered by operating cash.

Can CRZO meet its short-term obligations with the cash in hand?

Looking at CRZO’s US$450m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$118m, with a current ratio of 0.26x. The current ratio is calculated by dividing current assets by current liabilities.

NasdaqGS:CRZO Historical Debt, May 31st 2019
NasdaqGS:CRZO Historical Debt, May 31st 2019

Does CRZO face the risk of succumbing to its debt-load?

CRZO is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if CRZO’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CRZO, the ratio of 6.67x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CRZO ample headroom to grow its debt facilities.

Next Steps:

Although CRZO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for CRZO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Carrizo Oil & Gas to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CRZO’s future growth? Take a look at our free research report of analyst consensus for CRZO’s outlook.
  2. Valuation: What is CRZO 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 CRZO 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.