BGR Energy Systems Limited (NSEI:BGRENERGY) is a small-cap stock with a market capitalization of ₹9.92B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into BGRENERGY here.
How does BGRENERGY’s operating cash flow stack up against its debt?
BGRENERGY has shrunken its total debt levels in the last twelve months, from ₹23,030.4M to ₹20,011.0M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at ₹5,310.8M , ready to deploy into the business. Additionally, BGRENERGY has produced ₹5,448.8M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 27.23%, meaning that BGRENERGY’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BGRENERGY’s case, it is able to generate 0.27x cash from its debt capital.
Can BGRENERGY pay its short-term liabilities?
At the current liabilities level of ₹43,337.9M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. Usually, for electrical companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BGRENERGY face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, BGRENERGY is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In BGRENERGY’s case, the ratio of 1.35x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BGRENERGY’s low interest coverage already puts the company at higher risk of default.