While small-cap stocks, such as Blancco Technology Group plc (AIM:BLTG) with its market cap of GBP £35.46M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for BLTG
How does BLTG’s operating cash flow stack up against its debt?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as economic recessions, wars and natural disasters.Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future.We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of BLTG, operating cash flow turned out to be -0.75x its debt level over the past twelve months. This means what BLTG can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at BLTG’s operations at this point in time.
Can BLTG pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, BLTG could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that BLTG does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Does BLTG face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. BLTG’s debt-to-equity ratio stands at 20.84%, which indicates that its debt is at an acceptable level. 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 at least three times its interest payments is considered financially sound. In BLTG’s case, its interest is excessively covered by its earnings as the ratio sits at 8.4x. Lenders may be less hesitant to lend out more funding as BLTG’s high interest coverage is seen as responsible and safe practice.
Although BLTG’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Blancco Technology Group to see what other factors for BLTG you should consider.
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