Is Bengal Energy Ltd.’s (TSE:BNG) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Bengal Energy Ltd. (TSE:BNG), with a market cap of CA$12m. However, an important fact which most ignore is: how financially healthy is the business? Given that BNG is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into BNG here.

Does BNG Produce Much Cash Relative To Its Debt?

Over the past year, BNG has ramped up its debt from CA$16m to CA$17m – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$5.0m , ready to be used for running the business. Additionally, BNG has produced cash from operations of CA$2.9m during the same period of time, leading to an operating cash to total debt ratio of 17%, indicating that BNG’s current level of operating cash is not high enough to cover debt.

Can BNG pay its short-term liabilities?

With current liabilities at CA$1.9m, it seems that the business has been able to meet these commitments with a current assets level of CA$8.2m, leading to a 4.33x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high.

TSX:BNG Historical Debt, April 9th 2019
TSX:BNG Historical Debt, April 9th 2019

Does BNG face the risk of succumbing to its debt-load?

BNG is a relatively highly levered company with a debt-to-equity of 71%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since BNG is currently unprofitable, 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:

Although BNG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how BNG has been performing in the past. I suggest you continue to research Bengal Energy to get a more holistic view of the small-cap by looking at:

  1. Historical Performance: What has BNG’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.
  2. 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.