Yahoo Finance Are Gulf Keystone Petroleum Limited’s (LON:GKP) Interest Costs Too High?
Gulf Keystone Petroleum Limited (LON:GKP) is a small-cap stock with a market capitalization of UK£487.31m. 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? Oil and Gas companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into GKP here.
Does GKP produce enough cash relative to debt?
GKP has sustained its debt level by about UK£97.07m over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at UK£160.46m , ready to deploy into the business. Moreover, GKP has produced cash from operations of UK£75.89m in the last twelve months, leading to an operating cash to total debt ratio of 78.18%, indicating that GKP’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GKP’s case, it is able to generate 0.78x cash from its debt capital.
Does GKP’s liquid assets cover its short-term commitments?
With current liabilities at UK£64.24m, it seems that the business has been able to meet these obligations given the level of current assets of UK£239.36m, with a current ratio of 3.73x. Though, a ratio greater than 3x may be considered as too high, as GKP could be holding too much capital in a low-return investment environment.
Can GKP service its debt comfortably?
With a debt-to-equity ratio of 20.57%, GKP’s debt level may be seen as prudent. GKP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if GKP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GKP, the ratio of 2.43x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as GKP’s low interest coverage already puts the company at higher risk of default.
Next Steps:
GKP’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure GKP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Gulf Keystone Petroleum to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GKP’s future growth? Take a look at our free research report of analyst consensus for GKP’s outlook.
Valuation: What is GKP 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 GKP 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 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.
