Are Berkeley Energia Limited’s (ASX:BKY) Interest Costs Too High?
Berkeley Energia Limited (ASX:BKY) is a small-cap stock with a market capitalization of AU$136m. 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? Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into BKY here.
How much cash does BKY generate through its operations?
Over the past year, BKY has borrowed debt capital of around AU$70m , which is mainly comprised of near term debt. With this ramp up in debt, the current cash and short-term investment levels stands at AU$101m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of BKY’s operating efficiency ratios such as ROA here.
Can BKY meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$76m, it appears that the company has been able to meet these commitments with a current assets level of AU$103m, leading to a 1.35x current account ratio. For Oil and Gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does BKY face the risk of succumbing to its debt-load?
With total debt exceeding equities, BKY is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since BKY is currently unprofitable, sustainability of its current state of operations becomes a concern. 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:
BKY’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 BKY’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure BKY has company-specific issues impacting its capital structure decisions. You should continue to research Berkeley Energia to get a more holistic view of the small-cap by looking at:
Historical Performance: What has BKY’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.
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.
