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While small-cap stocks, such as BW Offshore Limited (OB:BWO) with its market cap of øre10b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis 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 BWO here.
BWO’s Debt (And Cash Flows)
Over the past year, BWO has maintained its debt levels at around US$1.4b – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$177m , ready to be used for running the business. On top of this, BWO has produced cash from operations of US$403m in the last twelve months, leading to an operating cash to total debt ratio of 30%, meaning that BWO’s operating cash is sufficient to cover its debt.
Does BWO’s liquid assets cover its short-term commitments?
Looking at BWO’s US$868m in current 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 0.58x. The current ratio is the number you get when you divide current assets by current liabilities.
Can BWO service its debt comfortably?
With total debt exceeding equity, BWO is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if BWO’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 BWO, the ratio of 2.49x 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.
Although BWO’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how BWO has been performing in the past. You should continue to research BW Offshore to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BWO’s future growth? Take a look at our free research report of analyst consensus for BWO’s outlook.
- Valuation: What is BWO 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 BWO 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 email@example.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.