Investors are always looking for growth in small-cap stocks like Big 5 Sporting Goods Corporation (NASDAQ:BGFV), with a market cap of US$78m. However, an important fact which most ignore is: how financially healthy is the business? Given that BGFV is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into BGFV here.
Does BGFV Produce Much Cash Relative To Its Debt?
Over the past year, BGFV has ramped up its debt from US$50m to US$72m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$6.8m to keep the business going. On top of this, BGFV has generated US$25m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 34%, signalling that BGFV’s operating cash is sufficient to cover its debt.
Can BGFV meet its short-term obligations with the cash in hand?
Looking at BGFV’s US$151m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.16x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Specialty Retail companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can BGFV service its debt comfortably?
With debt reaching 41% of equity, BGFV may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since BGFV is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although BGFV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how BGFV has been performing in the past. I suggest you continue to research Big 5 Sporting Goods to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BGFV’s future growth? Take a look at our free research report of analyst consensus for BGFV’s outlook.
- Valuation: What is BGFV 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 BGFV 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.
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