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Investors are always looking for growth in small-cap stocks like Basic-Fit NV (AMS:BFIT), with a market cap of €1.66b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into BFIT here.
How does BFIT’s operating cash flow stack up against its debt?
BFIT’s debt levels surged from €265.7m to €311.1m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, BFIT currently has €9.0m remaining in cash and short-term investments for investing into the business. On top of this, BFIT has produced €103.3m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 33.2%, meaning that BFIT’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BFIT’s case, it is able to generate 0.33x cash from its debt capital.
Does BFIT’s liquid assets cover its short-term commitments?
At the current liabilities level of €97.2m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.3x, which is below the prudent industry ratio of 3x.
Can BFIT service its debt comfortably?
BFIT is a relatively highly levered company with a debt-to-equity of 98.8%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some 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 after interest and tax at least three times its net interest payments is considered financially sound. In BFIT’s case, the ratio of 3.03x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BFIT ample headroom to grow its debt facilities.
Next Steps:
Although BFIT’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 lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure BFIT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Basic-Fit to get a better picture of the stock by looking at: