While small-cap stocks, such as Forbuild SA (WSE:BTX) with its market cap of ZŁ22.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, since poor capital management may bring about 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into BTX here.
How does BTX’s operating cash flow stack up against its debt?
BTX’s debt levels have fallen from ZŁ12.38M to ZŁ2.12M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, BTX’s cash and short-term investments stands at ZŁ663.00K , ready to deploy into the business. Additionally, BTX has produced ZŁ8.63M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 407.84%, signalling that BTX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BTX’s case, it is able to generate 4.08x cash from its debt capital.
Can BTX pay its short-term liabilities?
With current liabilities at ZŁ14.97M, the company has been able to meet these obligations given the level of current assets of ZŁ32.28M, with a current ratio of 2.16x. For Construction companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BTX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 4.86%, BTX’s debt level is relatively low. BTX is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if BTX’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 BTX, the ratio of 18.46x suggests that interest is comfortably 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:
BTX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure BTX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Forbuild to get a more holistic view of the stock by looking at:
- 1. Valuation: What is BTX 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 BTX is currently mispriced by the market.
- 2. Historical Performance: What has BTX’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.
- 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.