Small-cap companies such as Oceania Natural Limited (NZSE:ONL) with its market cap of USD $26 Million, benefit the most from improving economic conditions due to the growth potential, but on the other hand they also are highly prone to a downturn, thus making their financial strength an important factor in filtering out the risky ones. Although ONLs low debt-to-equity ratio of 19% indicates financial strength, theres more to it than just one ratio. <\/p>\n
Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps. While savvy investors arent wrong in looking for singular blockbuster opportunities and trying to achieve diversification on their own by allocating a small part of their portfolio capital to small-caps, that doesnt make these investments less risky individually. However, to help you reduce that risk, Im going to provide you with few basic aspects other than debt-to-equity ratio to gauge a ballpark estimate on how financially strong is the company. Check out our latest analysis for Oceania Natural <\/p>\n
Despite low debt, for Oceania Natural to continue operations during a downturn, it needs a sound liquidity position. When evaluating financial strength, I compare a companys current assets (cash and liquid assets) to its total debt. ONLs current assets ($7M) easily cover the total debt ($1M), giving it enough control on its balance sheet to survive a downturn. <\/p>\n
Oceania Natural (NZSE:ONL) Historical Debt Mar 9th 17 <\/p>\n
One of the key checks of Oceania Naturals financial health is to compare what it earns against the amount it pays as interest. This highlights the companys ability to service debt during a downturn. If a companys earnings are 5 times bigger than the amount it pays as interest, it is generally a good sign of financial health. In the case of ONL, the company is making a loss, therefore interest on debt is not well covered by earnings. <\/p>\n
Oceania Natural (NZSE:ONL) Net Worth Mar 9th 17 <\/p>\n
Clearly, Oceania Natural has a significantly low debt on its balance sheet. The company fails to impress in terms of generating strong enough operating cash flows or earnings. Thus, for now, I dont find it a financially sound company. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Oceania Natural to see what are ONLs growth prospects and whether it could be considered an undervalued opportunity. <\/p>\n
PS. If you are not interested in Oceania Natural anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential. <\/p>\n
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Oceania Natural Limited (NZSE:ONL): Does Low Debt-Load Make It A Financially Strong Company? - Simply Wall St<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Small-cap companies such as Oceania Natural Limited (NZSE:ONL) with its market cap of USD $26 Million, benefit the most from improving economic conditions due to the growth potential, but on the other hand they also are highly prone to a downturn, thus making their financial strength an important factor in filtering out the risky ones. Although ONLs low debt-to-equity ratio of 19% indicates financial strength, theres more to it than just one ratio. Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps Continue reading