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Investors are always looking for growth in small-cap stocks like Broo Limited (ASX:BEE), with a market cap of AU$15m. However, an important fact which most ignore is: how financially healthy is the business? Since BEE is loss-making right now, it’s crucial to assess 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. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into BEE here.
Does BEE Produce Much Cash Relative To Its Debt?
Over the past year, BEE has ramped up its debt from AU$2.2m to AU$2.9m , which includes long-term debt. With this increase in debt, BEE's cash and short-term investments stands at AU$307k , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, 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?
Looking at BEE’s AU$3.5m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of AU$1.8m, with a current ratio of 0.51x. The current ratio is the number you get when you divide current assets by current liabilities.
Can BEE service its debt comfortably?
BEE 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. But since BEE is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
BEE’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. I admit this is a fairly basic analysis for BEE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Broo to get a more holistic view 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.
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.