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BBA Aviation plc (LON:BBA) is a small-cap stock with a market capitalization of UK£2.7b. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into BBA here.
Does BBA Produce Much Cash Relative To Its Debt?
BBA has built up its total debt levels in the last twelve months, from US$1.3b to US$1.4b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$109m , ready to be used for running the business. On top of this, BBA has produced US$368m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 26%, meaning that BBA’s debt is appropriately covered by operating cash.
Can BBA pay its short-term liabilities?
With current liabilities at US$651m, it seems that the business has been able to meet these commitments with a current assets level of US$899m, leading to a 1.38x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Infrastructure companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BBA face the risk of succumbing to its debt-load?
BBA is a relatively highly levered company with a debt-to-equity of 74%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BBA's case, the ratio of 3.73x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
BBA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for BBA's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research BBA Aviation to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BBA’s future growth? Take a look at our free research report of analyst consensus for BBA’s outlook.
- Valuation: What is BBA 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 BBA is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.