You Might Like Golden Energy and Resources Limited (SGX:AUE) But Do You Like Its Debt?
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Investors are always looking for growth in small-cap stocks like Golden Energy and Resources Limited (SGX:AUE), with a market cap of S$506m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into AUE here.
AUE’s Debt (And Cash Flows)
Over the past year, AUE has ramped up its debt from US$227m to US$309m – this includes long-term debt. With this increase in debt, AUE's cash and short-term investments stands at US$121m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of AUE’s operating efficiency ratios such as ROA here.
Does AUE’s liquid assets cover its short-term commitments?
Looking at AUE’s US$241m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.76x. The current ratio is the number you get when you divide 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.
Is AUE’s debt level acceptable?
AUE is a relatively highly levered company with a debt-to-equity of 68%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AUE's case, the ratio of 6.68x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
AUE’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. Since there is also no concerns around AUE's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure AUE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Golden Energy and Resources to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AUE’s future growth? Take a look at our free research report of analyst consensus for AUE’s outlook.
Historical Performance: What has AUE'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.
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