What does Bonterra Energy Corp’s (TSE:BNE) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like Bonterra Energy Corp (TSE:BNE), with a market cap of CA$225m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. 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 recommend you dig deeper yourself into BNE here.

How does BNE’s operating cash flow stack up against its debt?

BNE has shrunken its total debt levels in the last twelve months, from CA$370m to CA$315m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at CA$209k , ready to deploy into the business. Moreover, BNE has generated CA$122m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 39%, meaning that BNE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BNE’s case, it is able to generate 0.39x cash from its debt capital.

Does BNE’s liquid assets cover its short-term commitments?

At the current liabilities level of CA$64m, the company may not have an easy time meeting these commitments with a current assets level of CA$28m, leading to a current ratio of 0.44x.

TSX:BNE Historical Debt January 10th 19
TSX:BNE Historical Debt January 10th 19

Can BNE service its debt comfortably?

With debt reaching 63% of equity, BNE 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. We can test if BNE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BNE, the ratio of 2.6x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BNE’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although BNE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how BNE has been performing in the past. I suggest you continue to research Bonterra Energy to get a better picture of the stock by looking at:

  1. Valuation: What is BNE 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 BNE is currently mispriced by the market.
  2. Historical Performance: What has BNE’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.
  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.

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 editorial-team@simplywallst.com.