Boss Resources Limited (ASX:BOE) is a small-cap stock with a market capitalization of AUD A$49.33M. 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. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Boss Resources
How does BOE’s operating cash flow stack up against its debt?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of BOE, operating cash flow turned out to be -0.66x its debt level over the past twelve months. This means what BOE can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at BOE’s operations at this point in time.
Does BOE’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, BOE may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that BOE is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Can BOE service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For BOE, the debt-to-equity ratio is 60.46%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.