Investors are always looking for growth in small-cap stocks like Tanager Energy Inc (TSXV:TAN), with a market cap of CA$10.77M. However, an important fact which most ignore is: how financially healthy is the business? 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 vital. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into TAN here.

Does TAN generate enough cash through operations?

Over the past year, TAN has ramped up its debt from CA$0.6M to CA$6.8M , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$0.7M , ready to deploy into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of TAN’s operating efficiency ratios such as ROA here.

Can TAN meet its short-term obligations with the cash in hand?

At the current liabilities level of CA$2.1M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.51x, which is below the prudent industry ratio of 3x.

Does TAN face the risk of succumbing to its debt-load?

TAN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since TAN is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Are you a shareholder? With a high level of debt on its balance sheet, TAN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for TAN to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may change. You should always be keeping on top of market expectations for TAN’s future growth on our free analysis platform.

Are you a potential investor? TAN’s large debt ratio along with low cash coverage of debt as well as low liquidity coverage of near-term obligations may send potential investors running the other way. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of TAN’s track record. As a following step, you should take a look at TAN’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.

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.