Investors are always looking for growth in small-cap stocks like Borges Agricultural & Industrial Nuts SA (BME:BAIN), with a market cap of €108.8m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to 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 suggest you dig deeper yourself into BAIN here.
How much cash does BAIN generate through its operations?
BAIN has sustained its debt level by about €39.5m over the last 12 months – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €4.9m , ready to deploy into the business. Additionally, BAIN has generated €14.0m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 35.5%, indicating that BAIN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BAIN’s case, it is able to generate 0.35x cash from its debt capital.
Does BAIN’s liquid assets cover its short-term commitments?
Looking at BAIN’s most recent €49.9m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €67.4m, with a current ratio of 1.35x. For Food 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.
Can BAIN service its debt comfortably?
With debt reaching 67.4% of equity, BAIN may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if BAIN’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 BAIN, the ratio of 3.36x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BAIN ample headroom to grow its debt facilities.
Next Steps:
BAIN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 BAIN has been performing in the past. I recommend you continue to research Borges Agricultural & Industrial Nuts to get a better picture of the small-cap by looking at: