How to find that there is enough cash to finance CAPEX
Just want to confirm that do it correctly:
Let's say the company announces CAPEX of $100mln for 2014. To understand whether they will need additional financing I would:
1) check their balance sheet to identify the cash and equivalents for the year 2013 end
2) estimate their sales (production level * realization price), costs and as a resulting cash from operations
-Would this approach be correct? If no, what is the correct one?
-What else should be considered? Dividend and debt payments come into my head
-Are there quicker ways to estimate sales?
-Is there a ratio that would say when approximately the company would need external financing to guarantee sufficient liquidity? For example, through year expected cash from operations is $50mln, and cash and equivalents by the year 2013 end is $60mln. It would be risky for the company to pray for that favorable scenario in which they will be left with $10 mln.
Thank you for input.
Set up FCF Look to see if there are any debt covenants in the financial report and that will give you the important ratios.
It sounds like you are perhaps looking at an E&P (production * realization)? If that is the case, I will tell you that most E&Ps outspend cash flow to develop assets (produce more cash flow) and this often isn't a problem.
Whether it is an E&P or not, you should check to see what the company's liquidity options are - do they have a revolver that is partially unused, do they have any lines of debt that can be expanded. Also check to see what kind of total leverage (Net Debt / EBITDA) they have.
You are right that there is likely a minimum amount of cash the company needs to operate, and they won't likely dip below that level. If they don't have the cash, and can't borrow any more, then they may need to raise equity.
For E&Ps, this often isn't much of a negative event. Companies often come public or make large acquisitions with a decent looking balance sheet, but it is expected that they may come to the equity markets for capital to accelerate development.
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