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Is BW Offshore Limited's (OB:BWO) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Investors are always looking for growth in small-cap stocks like BW Offshore Limited (OB:BWO), with a market cap of øre8.6b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into BWO here.

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BWO’s Debt (And Cash Flows)

Over the past year, BWO has maintained its debt levels at around US$1.4b – this includes long-term debt. At this current level of debt, BWO's cash and short-term investments stands at US$142m to keep the business going. On top of this, BWO has generated US$436m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 32%, signalling that BWO’s debt is appropriately covered by operating cash.

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

With current liabilities at US$597m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x. The current ratio is calculated by dividing current assets by current liabilities.

OB:BWO Historical Debt, May 16th 2019

Is BWO’s debt level acceptable?

Since total debt levels exceed equity, BWO is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BWO's case, the ratio of 1.94x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BWO’s low interest coverage already puts the company at higher risk of default.

Next Steps:

BWO’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. However, 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 BWO has been performing in the past. I suggest you continue to research BW Offshore to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BWO’s future growth? Take a look at our free research report of analyst consensus for BWO’s outlook.
  2. Valuation: What is BWO 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 BWO is currently mispriced by the market.
  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.

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 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.