Gran Tierra Energy Inc. (NYSEMKT:GTE) is a small-cap stock with a market capitalization of US$892m. 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? Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into GTE here.
GTE’s Debt (And Cash Flows)
Over the past year, GTE has ramped up its debt from US$257m to US$399m , which includes long-term debt. With this rise in debt, GTE currently has US$84m remaining in cash and short-term investments , ready to be used for running the business. Additionally, GTE has generated cash from operations of US$285m in the last twelve months, leading to an operating cash to total debt ratio of 71%, indicating that GTE’s current level of operating cash is high enough to cover debt.
Can GTE pay its short-term liabilities?
With current liabilities at US$169m, it seems that the business has been able to meet these obligations given the level of current assets of US$203m, with a current ratio of 1.2x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does GTE face the risk of succumbing to its debt-load?
With debt at 39% of equity, GTE may be thought of as appropriately levered. This range is considered safe as GTE is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether GTE 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 GTE’s, case, the ratio of 7.97x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GTE ample headroom to grow its debt facilities.
GTE’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how GTE has been performing in the past. You should continue to research Gran Tierra Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GTE’s future growth? Take a look at our free research report of analyst consensus for GTE’s outlook.
- Valuation: What is GTE 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 GTE 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.
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