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While small-cap stocks, such as BEST Inc. (NYSE:BEST) with its market cap of US$2.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since BEST is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into BEST here.
Does BEST Produce Much Cash Relative To Its Debt?
Over the past year, BEST has ramped up its debt from CN¥1.6b to CN¥6.8b made up of predominantly near term debt. With this rise in debt, BEST's cash and short-term investments stands at CN¥2.4b , ready to be used for running the business. Additionally, BEST has generated cash from operations of CN¥1.0b during the same period of time, resulting in an operating cash to total debt ratio of 15%, indicating that BEST’s operating cash is less than its debt.
Does BEST’s liquid assets cover its short-term commitments?
With current liabilities at CN¥8.9b, the company may not have an easy time meeting these commitments with a current assets level of CN¥7.5b, leading to a current ratio of 0.84x. The current ratio is the number you get when you divide current assets by current liabilities.
Does BEST face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 55%, BEST can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since BEST is currently unprofitable, 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.
BEST’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure BEST has company-specific issues impacting its capital structure decisions. I suggest you continue to research BEST to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BEST’s future growth? Take a look at our free research report of analyst consensus for BEST’s outlook.
- Valuation: What is BEST 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 BEST 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.
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.