Are Biffa plc’s (LON:BIFF) Interest Costs Too High?

Biffa plc (LON:BIFF) is a small-cap stock with a market capitalization of UK£578m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 suggest you dig deeper yourself into BIFF here.

Does BIFF produce enough cash relative to debt?

BIFF’s debt level has been constant at around UK£360m over the previous year made up of current and long term debt. At this stable level of debt, BIFF’s cash and short-term investments stands at UK£50m for investing into the business. Moreover, BIFF has generated UK£134m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 37%, meaning that BIFF’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BIFF’s case, it is able to generate 0.37x cash from its debt capital.

Can BIFF pay its short-term liabilities?

At the current liabilities level of UK£278m liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.89x.

LSE:BIFF Historical Debt October 31st 18
LSE:BIFF Historical Debt October 31st 18

Can BIFF service its debt comfortably?

With total debt exceeding equities, BIFF is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether BIFF is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BIFF’s, case, the ratio of 2.59x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although BIFF’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 BIFF has been performing in the past. You should continue to research Biffa to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BIFF’s future growth? Take a look at our free research report of analyst consensus for BIFF’s outlook.
  2. Valuation: What is BIFF 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 BIFF 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.

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.