Biglari Holdings Inc (NYSE:BH) is a small-cap stock with a market capitalization of USD $739.05M. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for BH
Does BH generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. BH’s recent operating cash flow was 0.14 times its debt within the past year. A ratio of over 0.1x shows that BH is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Can BH pay its short-term liabilities?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, BH could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for BH’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that BH does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Can BH service its debt comfortably?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For BH, the debt-to-equity ratio is 50.29%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. We can test if BH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. BH’s profits only covers interest 1.01 times, which is deemed as inadequate. Debtors may be less inclined to loan the company more money, giving BH less headroom for growth through debt.
Are you a shareholder? BH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. I recommend keeping abreast of market expectations for BH’s future growth on our free analysis platform.
Are you a potential investor? BH’s large debt ratio along with low cash coverage of debt in addition to low liquidity coverage of near-term commitments may send potential investors running the other way. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of BH’s track record. I encourage you to continue your research by taking a look at BH’s past performance analysis on our free platform to figure out BH’s financial health position.
To help readers see pass 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.