While small-cap stocks, such as Bass Oil Limited (ASX:BAS) with its market cap of AU$7.8m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into BAS here.
How does BAS’s operating cash flow stack up against its debt?
BAS has increased its debt level by about AU$1.7m over the last 12 months including long-term debt. With this increase in debt, BAS currently has AU$2.1m remaining in cash and short-term investments for investing into the business. Additionally, BAS has produced cash from operations of AU$654k over the same time period, leading to an operating cash to total debt ratio of 37%, indicating that BAS’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In BAS’s case, it is able to generate 0.37x cash from its debt capital.
Does BAS’s liquid assets cover its short-term commitments?
Looking at BAS’s AU$3.7m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. 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.
Can BAS service its debt comfortably?
With debt reaching 92% of equity, BAS may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since BAS is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
BAS’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 BAS’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for BAS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Bass Oil to get a more holistic view of the small-cap by looking at:
- Valuation: What is BAS 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 BAS is currently mispriced by the market.
- Historical Performance: What has BAS’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 firstname.lastname@example.org.