Are Bio Planet S.A.'s (WSE:BIP) Interest Costs Too High?
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Bio Planet S.A. (WSE:BIP) is a small-cap stock with a market capitalization of zł20m. 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? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to 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. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into BIP here.
Does BIP Produce Much Cash Relative To Its Debt?
Over the past year, BIP has maintained its debt levels at around zł8.2m which accounts for long term debt. At this constant level of debt, BIP's cash and short-term investments stands at zł338k to keep the business going. Moreover, BIP has generated zł1.2m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 15%, signalling that BIP’s debt is not covered by operating cash.
Can BIP meet its short-term obligations with the cash in hand?
With current liabilities at zł35m, the company may not be able to easily meet these obligations given the level of current assets of zł34m, with a current ratio of 0.98x. The current ratio is the number you get when you divide current assets by current liabilities.
Is BIP’s debt level acceptable?
With a debt-to-equity ratio of 71%, BIP can be considered as an above-average leveraged company. 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 BIP’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 BIP, the ratio of 2.16x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Although BIP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for BIP's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Bio Planet to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for BIP’s future growth? Take a look at our free research report of analyst consensus for BIP’s outlook.
Historical Performance: What has BIP'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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
