Yahoo Finance What does Leigh Creek Energy Limited’s (ASX:LCK) Balance Sheet Tell Us About Its Future?
While small-cap stocks, such as Leigh Creek Energy Limited (ASX:LCK) with its market cap of AU$83m, 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, in particular ones that run negative earnings, are inclined towards being 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, this commentary is still very high-level, so I recommend you dig deeper yourself into LCK here.
How does LCK’s operating cash flow stack up against its debt?
Over the past year, LCK has ramped up its debt from AU$2m to AU$4m made up of predominantly near term debt. With this growth in debt, LCK currently has AU$9m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of LCK’s operating efficiency ratios such as ROA here.
Does LCK’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$10m liabilities, the company has been able to meet these obligations given the level of current assets of AU$19m, with a current ratio of 1.86x. Generally, for Oil and Gas companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does LCK face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 15%, LCK’s debt level may be seen as prudent. LCK is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. LCK’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Although LCK’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure LCK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Leigh Creek Energy to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LCK’s future growth? Take a look at our free research report of analyst consensus for LCK’s outlook.
Historical Performance: What has LCK’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.
