Yahoo Finance Gulf Keystone Petroleum Limited (LON:GKP): Time For A Financial Health Check
Investors are always looking for growth in small-cap stocks like Gulf Keystone Petroleum Limited (LON:GKP), with a market cap of UK£596.2m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into GKP here.
How does GKP’s operating cash flow stack up against its debt?
GKP’s debt level has been constant at around US$97.1m over the previous year – this includes both the current and long-term debt. At this stable level of debt, GKP currently has US$160.5m remaining in cash and short-term investments for investing into the business. Moreover, GKP has produced cash from operations of US$75.9m during the same period of time, resulting in an operating cash to total debt ratio of 78.2%, signalling that GKP’s debt is appropriately covered by operating cash. 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.
Can GKP meet its short-term obligations with the cash in hand?
At the current liabilities level of US$64.2m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.73x. Though, anything above 3x is considered high and could mean that GKP has too much idle capital in low-earning investments.
Does GKP face the risk of succumbing to its debt-load?
GKP’s level of debt is appropriate relative to its total equity, at 20.6%. This range is considered safe as GKP is not taking on too much debt obligation, 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 refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
GKP’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, 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 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.
