Well Mr. Central, the jury is out and the report card according...

Well Mr. Central, the jury is out and the report card according to some are not favourable, no wonder this is a $0.035 (cent) company based on what is described below and known by long term, long -------------- shareholders.

As they would say in the US of A, simply wall st or if English, elimentory dear Watson or as they would say in Aust, fair dinkum. But but but in my household we say facts are facts.
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Central Petroleum Limited (ASX:CTP) is a small-cap-stock with a market capitalization of USD $63 Million. 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. There are always disruptions which destabilize and many a times end an existing industry, and most small-cap companies are the first casualties when such a wave hits.

When a company is faced with an extreme event undercutting its profits or disrupting its operations temporarily, it’s the company’s ability to meet short-term obligations which allows it to remain in the business. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know.

Does CTP generate enough cash through operations to meet all its needs?
While in short-term operating cash flows can be volatile, on an annual basis, they reflect the true picture of a company’s earnings quality and its ability to meet obligations . Over the past year, Central Petroleum’s operating cash flows stood at -1.2% of its overall debt. Central Petroleum currently has to rely on external funding to even run its business. This can be ok for a fast-growing company, but otherwise this is of course a sign of some serious debt-problems.


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Can CTP pay its short-term debts?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, the mismanagement comes into the limelight during tough situations such as economic recession, war, natural disaster, sudden increase in the price of raw materials, and a supply chain risk, which can put a company in a difficult situation . But that does not absolve the company from its obligations such as lease payments, interest payments, and salaries. In addition, failure to service debt and bank loans can very hurts its reputation, making funding extremely expensive in the future, if at all it survives. Central Petroleum is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.


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Can CTP service its debt comfortably?
A substantially higher-debt poses a significant threat to a company’s profitability during a downturn. Central Petroleum’s debt to equity ratio stands at 518.8% and this indicates that the company is holding a high level of debt / liabilities compared to its net worth, and in the event of financial stress may experience difficulty meeting debt or interest obligations . A more empirical and universal test is to measure the interest payments against earnings of a company. In an ideal situation, earnings should cover interest by at least a 5x multiple; thus, reducing any concerns related to high volatility in net income due to small fluctuations in operating performance. In CTP’s case the company is making a loss, therefore interest on debt is not well covered by earnings.

Final words
These balance sheet checks are a fine starting point to decide whether a company is worth your consideration; however, its growth profile and track record are equally important in deciding whether it’s doing better than its peers. I recommend you see our latest FREE analysis on Central Petroleum.

https://**.st/news/2017/01/24/is-central-petroleum-limited-asxctp-a-financially-sound-company/