Investors are always looking for growth in small-cap stocks like New Concept Energy Inc (NYSEMKT:GBR), with a market cap of US$2.85m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into GBR here.
Does GBR produce enough cash relative to debt?
Over the past year, GBR has reduced its debt from US$392.00k to US$324.00k , which comprises of short- and long-term debt. With this reduction in debt, GBR’s cash and short-term investments stands at US$419.00k for investing into the business. On top of this, GBR has produced cash from operations of US$202.00k during the same period of time, resulting in an operating cash to total debt ratio of 62.35%, indicating that GBR’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In GBR’s case, it is able to generate 0.62x cash from its debt capital.
Can GBR pay its short-term liabilities?
Looking at GBR’s most recent US$556.00k liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$522.00k, leading to a 0.94x current account ratio. which is under the appropriate industry ratio of 3x.
Can GBR service its debt comfortably?With debt reaching 60.16% of equity, GBR may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since GBR is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although GBR’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. However, 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 GBR’s financial health. Other important fundamentals need to be considered alongside. You should continue to research New Concept Energy to get a better picture of the stock by looking at:
- Historical Performance: What has GBR’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 our analysis for more clarity.
- 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.