Want to help shape the future of investing tools? Participate in a short research study and receive a subscription valued at $60.
While small-cap stocks, such as New Look Vision Group Inc. (TSE:BCI) with its market cap of CA$486m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BCI here.
Does BCI produce enough cash relative to debt?
Over the past year, BCI has ramped up its debt from CA$97m to CA$161m , which accounts for long term debt. With this rise in debt, BCI currently has CA$6.2m remaining in cash and short-term investments , ready to deploy into the business. Moreover, BCI has generated cash from operations of CA$37m in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that BCI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BCI’s case, it is able to generate 0.23x cash from its debt capital.
Does BCI’s liquid assets cover its short-term commitments?
Looking at BCI’s CA$69m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.82x.
Does BCI face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, BCI is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether BCI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BCI’s, case, the ratio of 3.63x suggests that interest is appropriately 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.
BCI’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how BCI has been performing in the past. I recommend you continue to research New Look Vision Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BCI’s future growth? Take a look at our free research report of analyst consensus for BCI’s outlook.
- Valuation: What is BCI 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 BCI 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.
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.