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While small-cap stocks, such as Craft Brew Alliance, Inc. (NASDAQ:BREW) with its market cap of US$270m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since BREW is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into BREW here.
Does BREW Produce Much Cash Relative To Its Debt?
BREW has built up its total debt levels in the last twelve months, from US$11m to US$71m – this includes long-term debt. With this increase in debt, BREW currently has US$1.2m remaining in cash and short-term investments , ready to be used for running the business. On top of this, BREW has produced US$14m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 20%, indicating that BREW’s debt is not covered by operating cash.
Can BREW pay its short-term liabilities?
With current liabilities at US$48m, the company has been able to meet these commitments with a current assets level of US$55m, leading to a 1.13x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Beverage companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BREW’s debt level acceptable?
With debt reaching 55% of equity, BREW may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since BREW is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
BREW’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure BREW has company-specific issues impacting its capital structure decisions. I recommend you continue to research Craft Brew Alliance to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BREW’s future growth? Take a look at our free research report of analyst consensus for BREW’s outlook.
- Valuation: What is BREW 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 BREW 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.