Investors are always looking for growth in small-cap stocks like Bonterra Energy Corp (TSE:BNE), with a market cap of CA$198m. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into BNE here.
How much cash does BNE generate through its operations?
BNE’s debt levels have fallen from CA$370m to CA$315m over the last 12 months , which includes long-term debt. With this debt repayment, BNE currently has CA$209k remaining in cash and short-term investments , ready to deploy into the business. Additionally, BNE has generated CA$122m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 39%, meaning that BNE’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BNE’s case, it is able to generate 0.39x cash from its debt capital.
Can BNE pay its short-term liabilities?
With current liabilities at CA$64m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.44x.
Is BNE’s debt level acceptable?
With a debt-to-equity ratio of 63%, BNE can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if BNE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BNE, the ratio of 2.6x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
BNE’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 lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how BNE has been performing in the past. I recommend you continue to research Bonterra Energy to get a more holistic view of the stock by looking at:
- Valuation: What is BNE 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 BNE is currently mispriced by the market.
- Historical Performance: What has BNE’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.
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