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Scrutinising Bass Oil Limited’s financials: Does the recent stock price jump indicate a stable state?

Bass Oil Limited
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Bass Oil Limited (ASX: BAS), an ASX-listed exploration and production company based mainly in the oil and gas region of South Sumatra, Indonesia, has shown remarkable but not easily digestible stock price hikes in the past seven days—a whopping 40% rise! This surge can be attributed to a combination of factors, including positive market sentiment towards the oil and gas industry, the company’s successful exploration efforts, and favorable geopolitical conditions in its operating regions.

The increase, priced at $0.063 when writing this article, calls for an in-depth analysis of the company’s position and stability.

The Australian oil company derives significant value from its 55% interest in the Tangai-Sukananti KSO-producing assets. These assets, located in the prolific oil & gas region of South Sumatra, Indonesia, are known for their high-quality reserves and favorable production conditions. Additionally, the company also operates in the Cooper Basin in Australia, another key region for oil and gas production.

The company’s annual reports suggest increased production in its major projects, but vital financial indicators need to be scrutinized when analyzing stock prices and investment opportunities.

In such a case, the Return on Equity (ROE) of Bass Oil Limited would be a definitive indicator to analyze! 

Bass Oil LimitedTangai-Sukananti KSO Location map

What is Return on Equity (ROE), and what does it indicate?

Return on equity (ROE) gauges a corporation’s efficiency in generating profits and, hence, measures its financial performance. The higher the ROE, the more efficient a company is at generating profits from the sale of shares (equity financing).

ROE can be thus calculated using the following equation: 

Return on Equity = Net income (from continuing operations) ÷ Shareholders’ Equity

Here, Net income is the net income, expenses, and taxes a company’s operations give rise to in a given period. 

On average, shareholders’ equity is calculated by adding equity at the beginning of a period that should coincide with the period during which the net income is calculated. This is usually done for a full fiscal year or trailing 12 months.

Net income can be found on the company’s income statement and shareholders’ equity on the balance sheet.

Picking these figures from Bass Oil Limited’s recently released financial reports, the ROE based on the trailing twelve months leading to December 2023 can be calculated into:

US$270k ÷ US$6.8m

= 4.0%

Now the question is, what does the 4% figure indicate?

Placing ROE of Bass Oil Limited among its competitors

As a mathematical figure, the 4% ROE means that for every A $ 1 worth of shareholders’ equity, the company could generate A $ 0.04 in profit.

However, an ROE calculation does not expect an absolute analysis but a comparative analysis—which means it is analyzed compared to the stock of peer companies in the same sector. The absolute value can change with various industries. 

Therefore, it is crucial to compare Bass Oil Limited’s ROE with the industry average. Typically, companies with higher returns on equity are the ones that demonstrate a higher growth rate.

From analysis, we can see that the industry average for oil and energy is 15%. This figure is based on a comprehensive study of the financial performance of major oil and energy companies in the industry, providing a reliable benchmark for comparison.

Unfortunately, Bass Oil’s 4% ROE is a cause for concern. It suggests a decline in income generation, with the company’s net income dropping by 4.3% over the past five years. This is in stark contrast to the industry’s 36% increase in gross earnings over the same period!

Counting in Payout ratio and growth in earnings

The dwindling figures are likely due to the company’s high payout ratio. A high payout ratio means that the company is distributing a large portion of its earnings to shareholders in the form of dividends, leaving less for reinvestment in the business. However, it is not so either. Bass Oil doesn’t pay dividends, meaning it may retain all its profits. Then, it should show its growth in earnings. But this is different when you see how its earnings have declined recently.

This only means that the company is facing significant hindrances to its management. These challenges can include regulatory changes, geopolitical risks, and operational issues, all of which can have a significant impact on the company’s financial performance and its ability to generate returns for its shareholders.

This means that despite the company retaining most of its profit, the benefit it gives the investors, even as long-term reinvestments, could be more promising. Long-term reinvestments can help the company to finance its growth initiatives, such as exploration and production projects, which can potentially lead to increased revenue and profitability in the future.

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