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

Bengal Energy Ltd (TSE:BNG) is a small-cap stock with a market capitalization of CA$10m. 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? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into BNG here.

How much cash does BNG generate through its operations?

Over the past year, BNG has maintained its debt levels at around CA$16m comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CA$4.6m for investing into the business. Moreover, BNG has produced cash from operations of CA$3.0m over the same time period, resulting in an operating cash to total debt ratio of 18%, signalling that BNG’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In BNG’s case, it is able to generate 0.18x cash from its debt capital.

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

With current liabilities at CA$11m, it seems that the business may not be able to easily meet these obligations given the level of current assets of CA$8.6m, with a current ratio of 0.75x.

TSX:BNG Historical Debt November 16th 18
TSX:BNG Historical Debt November 16th 18

Can BNG service its debt comfortably?

With a debt-to-equity ratio of 68%, BNG can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since BNG is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

At its current level of cash flow coverage, BNG has room for improvement to better cushion for events which may require debt repayment. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for BNG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Bengal Energy to get a better picture of the stock by looking at:

  1. Valuation: What is BNG 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 BNG is currently mispriced by the market.
  2. 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.
  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.