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Bravida Holding AB (publ) (STO:BRAV) is a small-cap stock with a market capitalization of kr13.4b. 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? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into BRAV here.
How much cash does BRAV generate through its operations?
BRAV’s debt levels have fallen from kr3.0b to kr2.0b over the last 12 months , which comprises of short- and long-term debt. With this debt payback, BRAV currently has kr604m remaining in cash and short-term investments , ready to deploy into the business. Additionally, BRAV has generated kr884m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 44%, signalling that BRAV’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BRAV’s case, it is able to generate 0.44x cash from its debt capital.
Can BRAV pay its short-term liabilities?
Looking at BRAV’s most recent kr7.2b liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of kr5.8b, leading to a current ratio of 0.79x.
Does BRAV face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 42%, BRAV can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if BRAV’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 BRAV, the ratio of 30.16x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as BRAV’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although BRAV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, 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 BRAV has been performing in the past. You should continue to research Bravida Holding to get a better picture of the stock by looking at: