While small-cap stocks, such as BPH Energy Limited (ASX:BPH) with its market cap of AUD A$1.18M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. See our latest analysis for BPH
Does BPH generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. Last year, BPH’s operating cash flow was -0.73x its current debt. This means what BPH 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 BPH’s operations at this point in time.
Does BPH’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, BPH may need to liquidate its short-term assets to pay these immediate obligations. We test for BPH’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that BPH does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can BPH service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of BPH, the debt-to-equity ratio is 16.14%, which indicates that its debt is at an acceptable level.
Next Steps:
Are you a shareholder? BPH’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may change. I suggest keeping on top of market expectations for BPH’s future growth on our free analysis platform.