While small-cap stocks, such as Overseas Shipholding Group Inc (NYSE:OSG) with its market cap of US$286.7m, 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, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into OSG here.
Does OSG produce enough cash relative to debt?
Over the past year, OSG has reduced its debt from US$508.7m to US$376.7m – this includes both the current and long-term debt. With this debt repayment, OSG’s cash and short-term investments stands at US$131.0m for investing into the business. On top of this, OSG has produced cash from operations of US$59.5m in the last twelve months, resulting in an operating cash to total debt ratio of 15.8%, indicating that OSG’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OSG’s case, it is able to generate 0.16x cash from its debt capital.
Can OSG meet its short-term obligations with the cash in hand?
With current liabilities at US$34.6m, it seems that the business has been able to meet these commitments with a current assets level of US$166.5m, leading to a 4.81x current account ratio. However, anything above 3x is considered high and could mean that OSG has too much idle capital in low-earning investments.
Does OSG face the risk of succumbing to its debt-load?OSG is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether OSG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In OSG’s, case, the ratio of 1.14x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
OSG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how OSG has been performing in the past. You should continue to research Overseas Shipholding Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OSG’s future growth? Take a look at our free research report of analyst consensus for OSG’s outlook.
- Valuation: What is OSG 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 OSG 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 email@example.com.