Investors are always looking for growth in small-cap stocks like Beach Energy Limited (ASX:BPT), with a market cap of AUD $1.87B. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Beach Energy

Does BPT 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. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of BPT, operating cash flow over the past twelve months do cover its current debt, which indicates extremely low risk of BPT not being able to meet its debt near-team, given that it generates enough cash in a year to pay off its current debt. This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.

Can BPT pay its short-term liabilities?

What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, BPT could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for BPT’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that BPT is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.

Does BPT face the risk of succumbing to its debt-load?

A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For BPT, the debt-to-equity ratio is 10.56%, which means its debt level does not pose a threat to its operations right now.

Next Steps:

Are you a shareholder? BPT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may be different. You should always be keeping abreast of market expectations for BPT’s future growth on our free analysis platform.