While small-cap stocks, such as Blackham Resources Limited (ASX:BLK) with its market cap of AU$54m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since BLK is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into BLK here.
How much cash does BLK generate through its operations?
Over the past year, BLK has reduced its debt from AU$40m to AU$32m – this includes long-term debt. With this reduction in debt, BLK’s cash and short-term investments stands at AU$21m , ready to deploy into the business. Moreover, BLK has produced cash from operations of AU$6.2m in the last twelve months, resulting in an operating cash to total debt ratio of 19%, meaning that BLK’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In BLK’s case, it is able to generate 0.19x cash from its debt capital.
Can BLK pay its short-term liabilities?
Looking at BLK’s AU$52m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of AU$38m, leading to a current ratio of 0.74x.
Can BLK service its debt comfortably?
With a debt-to-equity ratio of 31%, BLK’s debt level may be seen as prudent. This range is considered safe as BLK is not taking on too much debt obligation, which may be constraining for future growth. BLK’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
BLK has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how BLK has been performing in the past. I suggest you continue to research Blackham Resources to get a more holistic view of the stock by looking at:
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Historical Performance: What has BLK’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.