While small-cap stocks, such as Banro Corporation (TSX:BAA) with its market cap of CAD CA$16.48M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that BAA is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BAA here.
Does BAA generate an acceptable amount of cash through operations?
BAA has built up its total debt levels in the last twelve months, from $263M to $303M , which is made up of current and long term debt. With this rise in debt, BAA’s cash and short-term investments stands at $1M for investing into the business. Additionally, BAA has generated cash from operations of $4M during the same period of time, resulting in an operating cash to total debt ratio of 0.01x, indicating that BAA’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In BAA’s case, it is able to generate 0.01x cash from its debt capital.
Can BAA pay its short-term liabilities?
At the current liabilities level of $370M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of $115M, with a current ratio of 0.31x below the prudent level of 3x.
Can BAA service its debt comfortably?
With debt reaching 94.27% of equity, BAA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since BAA is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Are you a shareholder? BAA’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Moving forward, BAA’s financial situation may change. I suggest keeping on top of market expectations for BAA’s future growth on our free analysis platform.
Are you a potential investor? BAA’s large debt ratio along with low cash coverage of debt as well as low liquidity coverage of short-term expenses may scare some investors away intially. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of BAA’s track record. I encourage you to continue your research by taking a look at BAA’s past performance analysis on our free platform to conclude on BAA’s financial health.
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.