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While small-cap stocks, such as BBA Aviation plc (LON:BBA) with its market cap of UK£2.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into BBA here.
BBA’s Debt (And Cash Flows)
BBA has built up its total debt levels in the last twelve months, from US$1.3b to US$1.4b , which accounts for long term debt. With this rise in debt, BBA currently has US$109m remaining in cash and short-term investments to keep the business going. Additionally, BBA has generated cash from operations of US$368m in the last twelve months, leading to an operating cash to total debt ratio of 26%, signalling that BBA’s debt is appropriately covered by operating cash.
Does BBA’s liquid assets cover its short-term commitments?
Looking at BBA’s US$651m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Infrastructure companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BBA face the risk of succumbing to its debt-load?
With debt reaching 74% of equity, BBA may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if BBA’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 BBA, the ratio of 3.73x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BBA ample headroom to grow its debt facilities.
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. Since there is also no concerns around BBA's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for BBA's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research BBA Aviation to get a more holistic view of the small-cap by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.