Bluebird Merchant Ventures Limited (LSE:BMV) is a small-cap stock with a market capitalization of £5.32M. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BMV here.
Does BMV generate an acceptable amount of cash through operations?
Over the past year, BMV has ramped up its debt from $0.1M to $0.3M , which is made up of current and long term debt. With this increase in debt, BMV currently has $0.1M remaining in cash and short-term investments for investing 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of BMV’s operating efficiency ratios such as ROA here.
Can BMV pay its short-term liabilities?
At the current liabilities level of $1.0M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $5.2M, leading to a 5.33x current account ratio. However, anything above 3x is considered high and could mean that BMV has too much idle capital in low-earning investments.
Does BMV face the risk of succumbing to its debt-load?With debt at 7.53% of equity, BMV may be thought of as having low leverage. This range is considered safe as BMV is not taking on too much debt obligation, which may be constraining for future growth. We can test if BMV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BMV, the ratio of 202.89x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as BMV’s high interest coverage is seen as responsible and safe practice.
BMV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for BMV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Bluebird Merchant Ventures to get a better picture of the stock by looking at:
1. Historical Performance: What has BMV’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.