While small-cap stocks, such as TransGlobe Energy Corporation (NASDAQ:TGA) with its market cap of US$129m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into TGA here.
Does TGA produce enough cash relative to debt?
Over the past year, TGA has reduced its debt from US$80m to US$53m , which also accounts for long term debt. With this debt payback, TGA’s cash and short-term investments stands at US$63m for investing into the business. On top of this, TGA has generated cash from operations of US$104m in the last twelve months, resulting in an operating cash to total debt ratio of 197%, indicating that TGA’s operating cash is sufficient to cover its 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 TGA’s case, it is able to generate 1.97x cash from its debt capital.
Can TGA meet its short-term obligations with the cash in hand?
With current liabilities at US$33m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.59x. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can TGA service its debt comfortably?
With debt at 27% of equity, TGA may be thought of as appropriately levered. TGA is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with TGA, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
TGA’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for TGA’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research TransGlobe Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TGA’s future growth? Take a look at our free research report of analyst consensus for TGA’s outlook.
- Valuation: What is TGA 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 TGA 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.