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While small-cap stocks, such as Carrizo Oil & Gas, Inc. (NASDAQ:CRZO) with its market cap of US$1.2b, 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 Oil and Gas industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into CRZO here.
How does CRZO’s operating cash flow stack up against its debt?
CRZO has shrunken its total debt levels in the last twelve months, from US$1.7b to US$1.3b , which also accounts for long term debt. With this debt repayment, CRZO currently has US$2.4m remaining in cash and short-term investments for investing into the business. Moreover, CRZO has generated US$608m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 46%, meaning that CRZO’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CRZO’s case, it is able to generate 0.46x cash from its debt capital.
Can CRZO meet its short-term obligations with the cash in hand?
Looking at CRZO’s US$556m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$151m, leading to a current ratio of 0.27x.
Is CRZO’s debt level acceptable?
Since total debt levels have outpaced equities, CRZO 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. 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 3.28x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CRZO’s high interest coverage is seen as responsible and safe practice.
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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure CRZO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Carrizo Oil & Gas to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.