Yahoo Finance Is Sundance Energy Australia Limited (ASX:SEA) A Financially Sound Company?
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Investors are always looking for growth in small-cap stocks like Sundance Energy Australia Limited (ASX:SEA), with a market cap of AU$272m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into SEA here.
Does SEA produce enough cash relative to debt?
SEA has built up its total debt levels in the last twelve months, from US$189m to US$255m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$2.7m , ready to deploy into the business. Additionally, SEA has generated US$49m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19%, signalling that SEA’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In SEA’s case, it is able to generate 0.19x cash from its debt capital.
Can SEA meet its short-term obligations with the cash in hand?
Looking at SEA’s US$101m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$65m, with a current ratio of 0.64x.
Can SEA service its debt comfortably?
With a debt-to-equity ratio of 78%, SEA can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SEA is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although SEA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for SEA’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Sundance Energy Australia to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SEA’s future growth? Take a look at our free research report of analyst consensus for SEA’s outlook.
Valuation: What is SEA 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 SEA is currently mispriced by the market.
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.
