Brookdale Senior Living Inc (NYSE:BKD) is a small-cap stock with a market capitalization of US$1.50B. 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? Companies operating in the Healthcare industry, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into BKD here.
Does BKD generate an acceptable amount of cash through operations?
BKD’s debt levels have fallen from US$6.05B to US$5.14B over the last 12 months – this includes both the current and long-term debt. With this debt repayment, BKD’s cash and short-term investments stands at US$514.44M , ready to deploy into the business. On top of this, BKD has produced US$366.66M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 7.13%, signalling that BKD’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In BKD’s case, it is able to generate 0.071x cash from its debt capital.
Can BKD meet its short-term obligations with the cash in hand?
At the current liabilities level of US$1.10B liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$901.87M, leading to a 0.82x current account ratio. which is under the appropriate industry ratio of 3x.
Can BKD service its debt comfortably?Since total debt levels have outpaced equities, BKD is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since BKD is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
BKD’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for BKD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Brookdale Senior Living to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BKD’s future growth? Take a look at our free research report of analyst consensus for BKD’s outlook.
- Valuation: What is BKD 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 BKD 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.