While small-cap stocks, such as Broo Limited (ASX:BEE) with its market cap of AU$33m, 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 BEE is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into BEE here.
How much cash does BEE generate through its operations?
BEE’s debt levels surged from AU$168k to AU$3.0m over the last 12 months – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$639k , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of BEE’s operating efficiency ratios such as ROA here.
Can BEE meet its short-term obligations with the cash in hand?
With current liabilities at AU$3.7m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.54x.
Can BEE service its debt comfortably?
BEE is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since BEE is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although BEE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for BEE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Broo to get a better picture of the stock by looking at:
- Historical Performance: What has BEE’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 email@example.com.