Investors are always looking for growth in small-cap stocks like Stone Energy Corporation (NYSE:SGY), with a market cap of US$622.37M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SGY here.
Does SGY generate enough cash through operations?
SGY has built up its total debt levels in the last twelve months, from US$1.06B to US$1.43B – this includes both the current and long-term debt. With this rise in debt, SGY currently has US$190.58M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SGY has produced US$78.59M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 5.50%, indicating that SGY’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In SGY’s case, it is able to generate 0.055x cash from its debt capital.
Does SGY’s liquid assets cover its short-term commitments?
Looking at SGY’s most recent US$478.06M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.58x, which is below the prudent industry ratio of 3x.
Is SGY’s debt level acceptable?With debt reaching 81.17% of equity, SGY may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since SGY is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
With a high level of debt on its balance sheet, SGY could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SGY to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for SGY’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Stone Energy to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
- 1. Valuation: What is SGY worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether SGY is currently mispriced by the market.
- 2. Historical Performance: What has SGY’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of SGY’s historicals for more clarity.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a free list of these great stocks here.