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Is Bengal Energy Ltd’s (TSE:BNG) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Bengal Energy Ltd (TSE:BNG), with a market cap of CA$9.7m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BNG here.

How much cash does BNG generate through its operations?

BNG has sustained its debt level by about CA$16.4m over the last 12 months comprising of short- and long-term debt. At this current level of debt, BNG currently has CA$4.6m remaining in cash and short-term investments , ready to deploy into the business. Moreover, BNG has produced CA$3.0m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 18.0%, signalling that BNG’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In BNG’s case, it is able to generate 0.18x cash from its debt capital.

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

Looking at BNG’s most recent CA$11.5m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of CA$8.6m, leading to a 0.75x current account ratio. which is under the appropriate industry ratio of 3x.

TSX:BNG Historical Debt September 12th 18
TSX:BNG Historical Debt September 12th 18

Is BNG’s debt level acceptable?

With a debt-to-equity ratio of 68.3%, BNG can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since BNG is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

At its current level of cash flow coverage, BNG has room for improvement to better cushion for events which may require debt repayment. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how BNG has been performing in the past. You should continue to research Bengal Energy to get a better picture of the stock by looking at:

  1. Valuation: What is BNG 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 BNG is currently mispriced by the market.

  2. Historical Performance: What has BNG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  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.

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