What does Biffa plc’s (LON:BIFF) Balance Sheet Tell Us About Its Future?

Biffa plc (LON:BIFF) is a small-cap stock with a market capitalization of UK£595.00m. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into BIFF here.

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

BIFF’s debt level has been constant at around UK£359.70m over the previous year comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at UK£50.20m , ready to deploy into the business. On top of this, BIFF has produced UK£134.20m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 37.31%, indicating that BIFF’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 BIFF’s case, it is able to generate 0.37x cash from its debt capital.

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

With current liabilities at UK£278.20m, the company is not able to meet these obligations given the level of current assets of UK£248.10m, with a current ratio of 0.89x below the prudent level of 3x.

LSE:BIFF Historical Debt July 14th 18
LSE:BIFF Historical Debt July 14th 18

Can BIFF service its debt comfortably?

Since total debt levels have outpaced equities, BIFF is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax 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 lenders may be more reluctant to lend out more funding as BIFF’s low interest coverage already puts the company at higher risk of default.

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. This is only a rough assessment of financial health, and I’m sure BIFF has company-specific issues impacting its capital structure decisions. You should continue to research Biffa to get a more holistic view 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.