Is Cequence Energy Ltd’s (TSE:CQE) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Cequence Energy Ltd (TSX:CQE) with its market cap of CA$20.87M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into CQE here.
Does CQE generate enough cash through operations?
Over the past year, CQE has maintained its debt levels at around CA$59.34M – this includes both the current and long-term debt. At this constant level of debt, CQE currently has CA$11.49M remaining in cash and short-term investments , ready to deploy into the business. Moreover, CQE has generated cash from operations of CA$19.88M in the last twelve months, leading to an operating cash to total debt ratio of 33.51%, meaning that CQE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In CQE’s case, it is able to generate 0.34x cash from its debt capital.
Can CQE pay its short-term liabilities?
Looking at CQE’s most recent CA$95.06M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CA$27.50M, leading to a 0.29x current account ratio. which is under the appropriate industry ratio of 3x.
Does CQE face the risk of succumbing to its debt-load?
CQE’s level of debt is appropriate relative to its total equity, at 39.95%. This range is considered safe as CQE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with CQE, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
CQE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though 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 CQE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Cequence Energy to get a more holistic view of the stock by looking at:
Valuation: What is CQE 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 CQE is currently mispriced by the market.
Historical Performance: What has CQE’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 pass 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.
