While small-cap stocks, such as Bathurst Resources Limited (ASX:BRL) with its market cap of NZ$226.97m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that BRL is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into BRL here.
How does BRL’s operating cash flow stack up against its debt?
Over the past year, BRL has ramped up its debt from NZ$7.45m to NZ$28.60m – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at NZ$3.35m for investing into the business. On top of this, BRL has generated NZ$11.60m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 40.56%, meaning that BRL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In BRL’s case, it is able to generate 0.41x cash from its debt capital.
Can BRL meet its short-term obligations with the cash in hand?
With current liabilities at NZ$24.53m, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.69x, which is below the prudent industry ratio of 3x.
Does BRL face the risk of succumbing to its debt-load?With debt reaching 55.14% of equity, BRL may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since BRL is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
BRL’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure BRL has company-specific issues impacting its capital structure decisions. You should continue to research Bathurst Resources to get a better picture of the stock by looking at:
- Historical Performance: What has BRL’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.