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Investors are always looking for growth in small-cap stocks like Bouvet ASA (OB:BOUVET), with a market cap of øre3.0b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into BOUVET here.
Does BOUVET Produce Much Cash Relative To Its Debt?
BOUVET has increased its debt level by about øre254m over the last 12 months accounting for long term debt. With this ramp up in debt, BOUVET currently has øre267m remaining in cash and short-term investments to keep the business going. On top of this, BOUVET has produced cash from operations of øre238m over the same time period, resulting in an operating cash to total debt ratio of 94%, indicating that BOUVET’s operating cash is sufficient to cover its debt.
Does BOUVET’s liquid assets cover its short-term commitments?
At the current liabilities level of øre590m, the company has been able to meet these obligations given the level of current assets of øre765m, with a current ratio of 1.3x. The current ratio is the number you get when you divide current assets by current liabilities. For IT companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is BOUVET’s debt level acceptable?
BOUVET is a relatively highly levered company with a debt-to-equity of 76%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Next Steps:
Although BOUVET’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how BOUVET has been performing in the past. You should continue to research Bouvet to get a better picture of the small-cap by looking at:
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Future Outlook: What are well-informed industry analysts predicting for BOUVET’s future growth? Take a look at our free research report of analyst consensus for BOUVET’s outlook.
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Valuation: What is BOUVET worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BOUVET is currently mispriced by the market.
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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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.