Hollywood Bowl Group plc (LON:BOWL) is a small-cap stock with a market capitalization of UK£351m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into BOWL here.
How does BOWL’s operating cash flow stack up against its debt?
BOWL has sustained its debt level by about UK£28m over the last 12 months which accounts for long term debt. At this constant level of debt, BOWL currently has UK£26m remaining in cash and short-term investments for investing into the business. Moreover, BOWL has generated cash from operations of UK£31m in the last twelve months, resulting in an operating cash to total debt ratio of 109%, signalling that BOWL’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BOWL’s case, it is able to generate 1.09x cash from its debt capital.
Can BOWL meet its short-term obligations with the cash in hand?
Looking at BOWL’s UK£21m in current liabilities, the company has been able to meet these obligations given the level of current assets of UK£34m, with a current ratio of 1.62x. For Hospitality 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.
Is BOWL’s debt level acceptable?
BOWL’s level of debt is appropriate relative to its total equity, at 30%. BOWL is not taking on too much debt commitment, which may be constraining for future growth. We can test if BOWL’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 BOWL, the ratio of 28.2x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
BOWL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how BOWL has been performing in the past. You should continue to research Hollywood Bowl Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BOWL’s future growth? Take a look at our free research report of analyst consensus for BOWL’s outlook.
- Valuation: What is BOWL 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 BOWL is currently mispriced by the market.
- 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.
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