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Is BBA Aviation plc’s (LON:BBA) Balance Sheet A Threat To Its Future?

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as BBA Aviation plc (LON:BBA) with a market-capitalization of UK£2.3b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. BBA’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into BBA here.

Check out our latest analysis for BBA Aviation

How much cash does BBA generate through its operations?

BBA has shrunken its total debt levels in the last twelve months, from US$1.4b to US$1.3b , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$148m , ready to deploy into the business. Additionally, BBA has produced cash from operations of US$395m over the same time period, leading to an operating cash to total debt ratio of 29%, meaning that BBA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BBA’s case, it is able to generate 0.29x cash from its debt capital.

Does BBA’s liquid assets cover its short-term commitments?

At the current liabilities level of US$592m, it appears that the company has been able to meet these obligations given the level of current assets of US$836m, with a current ratio of 1.41x. Generally, for Infrastructure companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:BBA Historical Debt December 14th 18

Can BBA service its debt comfortably?

BBA is a relatively highly levered company with a debt-to-equity of 71%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether BBA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BBA’s, case, the ratio of 4.81x 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:

BBA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 BBA has been performing in the past. You should continue to research BBA Aviation to get a more holistic view of the mid-cap by looking at:

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.