BSA Limited (ASX:BSA) is a small-cap stock with a market capitalization of AU$143.79M. 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? Evaluating financial health as part of your investment thesis is essential, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into BSA here.

Does BSA generate enough cash through operations?

BSA’s debt level has been constant at around AU$2.93M over the previous year made up of predominantly near term debt. At this stable level of debt, BSA currently has AU$16.43M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of BSA’s operating efficiency ratios such as ROA here.

Can BSA pay its short-term liabilities?

At the current liabilities level of AU$104.37M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$117.65M, with a current ratio of 1.13x. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Can BSA service its debt comfortably?

With a debt-to-equity ratio of 11.75%, BSA’s debt level may be seen as prudent. This range is considered safe as BSA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BSA’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 BSA, the ratio of 26.9x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although BSA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for BSA’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research BSA to get a more holistic view of the stock by looking at: