Yahoo Finance What You Must Know About ShaMaran Petroleum Corp’s (CVE:SNM) Financial Strength
ShaMaran Petroleum Corp (CVE:SNM) is a small-cap stock with a market capitalization of CA$269.8m. 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 inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. 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 recommend you dig deeper yourself into SNM here.
Does SNM produce enough cash relative to debt?
SNM’s debt levels surged from US$175.1m to US$186.1m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, SNM currently has US$1.6m remaining in cash and short-term investments for investing into the business. Additionally, SNM has generated cash from operations of US$22.8m in the last twelve months, resulting in an operating cash to total debt ratio of 12.2%, indicating that SNM’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SNM’s case, it is able to generate 0.12x cash from its debt capital.
Can SNM pay its short-term liabilities?
At the current liabilities level of US$191.5m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of US$67.6m, with a current ratio of 0.35x below the prudent level of 3x.
Can SNM service its debt comfortably?
With total debt exceeding equities, SNM is considered a highly levered 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 SNM’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 SNM, the ratio of 1.5x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SNM’s low interest coverage already puts the company at higher risk of default.
Next Steps:
SNM’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how SNM has been performing in the past. You should continue to research ShaMaran Petroleum to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SNM’s future growth? Take a look at our free research report of analyst consensus for SNM’s outlook.
Historical Performance: What has SNM’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.
