Is Baylin Technologies Inc.'s (TSE:BYL) Balance Sheet A Threat To Its Future?

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Baylin Technologies Inc. (TSE:BYL) is a small-cap stock with a market capitalization of CA$172m. 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? Electronic companies, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is 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’d encourage you to dig deeper yourself into BYL here.

Does BYL produce enough cash relative to debt?

BYL's debt levels surged from CA$4.5m to CA$54m over the last 12 months , which accounts for long term debt. With this growth in debt, BYL currently has CA$19m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of BYL’s operating efficiency ratios such as ROA here.

Can BYL meet its short-term obligations with the cash in hand?

Looking at BYL’s CA$33m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.36x. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is BYL’s debt level acceptable?

With a debt-to-equity ratio of 68%, BYL can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since BYL is presently unprofitable, 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:

BYL’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. Since there is also no concerns around BYL's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how BYL has been performing in the past. You should continue to research Baylin Technologies to get a better picture of the small-cap by looking at:

1. Valuation: What is BYL 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 BYL is currently mispriced by the market.
2. Historical Performance: What has BYL'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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.