Bisalloy Steel Group Limited (ASX:BIS) is a small-cap stock with a market capitalization of AU$41m. 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. Why is it important? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into BIS here.
How much cash does BIS generate through its operations?
Over the past year, BIS has maintained its debt levels at around AU$8.5m including long-term debt. At this stable level of debt, BIS currently has AU$2.6m remaining in cash and short-term investments for investing into the business. On top of this, BIS has produced AU$1.4m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 17%, signalling that BIS’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BIS’s case, it is able to generate 0.17x cash from its debt capital.
Does BIS’s liquid assets cover its short-term commitments?
Looking at BIS’s AU$30m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$47m, with a current ratio of 1.59x. For Metals and Mining companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BIS’s debt level acceptable?
With a debt-to-equity ratio of 28%, BIS’s debt level may be seen as prudent. This range is considered safe as BIS is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether BIS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BIS’s, case, the ratio of 6.4x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
BIS’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for BIS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Bisalloy Steel Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BIS’s future growth? Take a look at our free research report of analyst consensus for BIS’s outlook.
- Historical Performance: What has BIS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 firstname.lastname@example.org.