While small-cap stocks, such as Briggs & Stratton Corporation (NYSE:BGG) with its market cap of US$537m, 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 BGG is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into BGG here.
BGG’s Debt (And Cash Flows)
BGG’s debt levels surged from US$351m to US$513m over the last 12 months – this includes long-term debt. With this increase in debt, BGG currently has US$34m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of BGG’s operating efficiency ratios such as ROA here.
Can BGG pay its short-term liabilities?
With current liabilities at US$673m, it seems that the business has been able to meet these obligations given the level of current assets of US$882m, with a current ratio of 1.31x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does BGG face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, BGG is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since BGG is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although BGG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around BGG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure BGG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Briggs & Stratton to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BGG’s future growth? Take a look at our free research report of analyst consensus for BGG’s outlook.
- Valuation: What is BGG 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 BGG 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.
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