How Financially Strong Is Orca Exploration Group Inc (CVE:ORC.B)?
Orca Exploration Group Inc (CVE:ORC.B) is a small-cap stock with a market capitalization of CA$176m. 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, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into ORC.B here.
Does ORC.B produce enough cash relative to debt?
ORC.B has sustained its debt level by about US$59m over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, ORC.B’s cash and short-term investments stands at US$117m for investing into the business. Additionally, ORC.B has produced US$42m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 71%, meaning that ORC.B’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ORC.B’s case, it is able to generate 0.71x cash from its debt capital.
Can ORC.B pay its short-term liabilities?
Looking at ORC.B’s most recent US$61m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$133m, leading to a 2.18x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ORC.B service its debt comfortably?
With a debt-to-equity ratio of 66%, ORC.B can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ORC.B’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ORC.B, the ratio of 0.9x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ORC.B’s low interest coverage already puts the company at higher risk of default.
Next Steps:
ORC.B’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for ORC.B’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Orca Exploration Group to get a better picture of the small-cap by looking at:
Valuation: What is ORC.B 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 ORC.B is currently mispriced by the market.
Historical Performance: What has ORC.B’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.
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 editorial-team@simplywallst.com.
