Is Black Diamond Group Limited’s (TSE:BDI) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Black Diamond Group Limited (TSE:BDI), with a market cap of CA$101m. However, an important fact which most ignore is: how financially healthy is the business? Since BDI is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into BDI here.

BDI’s Debt (And Cash Flows)

BDI has shrunk its total debt levels in the last twelve months, from CA$115m to CA$90m – this includes long-term debt. With this debt repayment, BDI’s cash and short-term investments stands at CA$3.2m to keep the business going. Additionally, BDI has generated CA$39m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 43%, meaning that BDI’s operating cash is sufficient to cover its debt.

Can BDI pay its short-term liabilities?

Looking at BDI’s CA$36m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

TSX:BDI Historical Debt, March 18th 2019
TSX:BDI Historical Debt, March 18th 2019

Is BDI’s debt level acceptable?

With debt reaching 40% of equity, BDI may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since BDI is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

BDI’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. I admit this is a fairly basic analysis for BDI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Black Diamond Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BDI’s future growth? Take a look at our free research report of analyst consensus for BDI’s outlook.
  2. Valuation: What is BDI 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 BDI is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.