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Is AirBoss of America Corp.'s (TSE:BOS) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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AirBoss of America Corp. (TSE:BOS) is a small-cap stock with a market capitalization of CA$198m. 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? Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into BOS here.

Does BOS Produce Much Cash Relative To Its Debt?

BOS has sustained its debt level by about US$71m over the last 12 months which accounts for long term debt. At this stable level of debt, BOS's cash and short-term investments stands at US$9.9m to keep the business going. On top of this, BOS has generated cash from operations of US$19m during the same period of time, leading to an operating cash to total debt ratio of 27%, indicating that BOS’s debt is appropriately covered by operating cash.

Can BOS meet its short-term obligations with the cash in hand?

Looking at BOS’s US$47m in current liabilities, the company has been able to meet these commitments with a current assets level of US$122m, leading to a 2.57x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:BOS Historical Debt, July 3rd 2019

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

With a debt-to-equity ratio of 58%, BOS can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BOS's case, the ratio of 4.39x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although BOS’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. This is only a rough assessment of financial health, and I'm sure BOS has company-specific issues impacting its capital structure decisions. I recommend you continue to research AirBoss of America to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BOS’s future growth? Take a look at our free research report of analyst consensus for BOS’s outlook.
  2. Valuation: What is BOS 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 BOS is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.