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Bluechiip Limited (ASX:BCT) is a small-cap stock with a market capitalization of AU$28m. 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 Electronic industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into BCT here.
Does BCT produce enough cash relative to debt?
BCT has sustained its debt level by about AU$600k over the last 12 months . At this stable level of debt, BCT’s cash and short-term investments stands at AU$1.2m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of BCT’s operating efficiency ratios such as ROA here.
Does BCT’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$1.3m, the company has been able to meet these obligations given the level of current assets of AU$2.9m, with a current ratio of 2.18x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does BCT face the risk of succumbing to its debt-load?
BCT’s level of debt is appropriate relative to its total equity, at 37%. BCT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for BCT, and the company also has the ability and headroom to increase debt if needed going forward.
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BCT’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how BCT has been performing in the past. I recommend you continue to research Bluechiip to get a more holistic view of the stock by looking at: