Tsakos Energy Navigation Limited (NYSE:TNP) is a small-cap stock with a market capitalization of US$294.65m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. 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’d encourage you to dig deeper yourself into TNP here.
How does TNP’s operating cash flow stack up against its debt?
Over the past year, TNP has reduced its debt from US$1.81b to US$1.71b – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$158.25m , ready to deploy into the business. On top of this, TNP has generated US$140.96m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 8.22%, signalling that TNP’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In TNP’s case, it is able to generate 0.082x cash from its debt capital.
Does TNP’s liquid assets cover its short-term commitments?
At the current liabilities level of US$424.28m 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 0.65x, which is below the prudent industry ratio of 3x.
Can TNP service its debt comfortably?
TNP 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. However, since TNP is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.Next Steps:
With a high level of debt on its balance sheet, TNP 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 TNP to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for TNP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tsakos Energy Navigation to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TNP’s future growth? Take a look at our free research report of analyst consensus for TNP’s outlook.
- Valuation: What is TNP 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 TNP 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 pass 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.