BEST S.A. (WSE:BST) is a small-cap stock with a market capitalization of zł529m. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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, potential investors would need to take a closer look, and I suggest you dig deeper yourself into BST here.
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BST’s Debt (And Cash Flows)
BST's debt levels have fallen from zł760m to zł704m over the last 12 months , which also accounts for long term debt. With this reduction in debt, BST currently has zł325m remaining in cash and short-term investments , ready to be used for running the business. Moreover, BST has produced cash from operations of zł89m in the last twelve months, resulting in an operating cash to total debt ratio of 13%, signalling that BST’s debt is not covered by operating cash.
Can BST pay its short-term liabilities?
At the current liabilities level of zł134m, it seems that the business has been able to meet these obligations given the level of current assets of zł334m, with a current ratio of 2.5x. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can BST service its debt comfortably?
BST is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 BST's case, the ratio of 1.9x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
BST’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for BST's financial health. Other important fundamentals need to be considered alongside. You should continue to research BEST to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BST’s future growth? Take a look at our free research report of analyst consensus for BST’s outlook.
- Valuation: What is BST 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 BST 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.
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 email@example.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.