CSI Compressco LP (NASDAQ:CCLP) is a small-cap stock with a market capitalization of $192.61M. 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? Energy Services companies, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CCLP here.

Does CCLP generate enough cash through operations?

CCLP has sustained its debt level by about $592.2M over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, CCLP currently has $20.8M remaining in cash and short-term investments for investing into the business. Additionally, CCLP has generated $61.4M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.1x, meaning that CCLP’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In CCLP’s case, it is able to generate 0.1x cash from its debt capital.

Does CCLP’s liquid assets cover its short-term commitments?

With current liabilities at $49.9M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $102.0M, with a current ratio of 2.04x. Usually, for energy services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

CCLP 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. But since CCLP 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? CCLP’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. I recommend researching market expectations for CCLP’s future growth on our free analysis platform.

Are you a potential investor? CCLP’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. You should continue your analysis by taking a look at CCLP’s past performance analysis on our free platform to conclude on CCLP’s financial health.

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.