While small-cap stocks, such as B3 Consulting Group AB (publ) ( STO:B3 ) with its market cap of kr505m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into B3 here .
Does B3 Produce Much Cash Relative To Its Debt?
B3’s debt levels surged from kr38m to kr80m over the last 12 months , which accounts for long term debt. With this increase in debt, B3’s cash and short-term investments stands at kr22m , ready to be used for running the business. Additionally, B3 has produced kr45m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 56%, meaning that B3’s current level of operating cash is high enough to cover debt.
Can B3 pay its short-term liabilities?
At the current liabilities level of kr239m, it appears that the company may not be able to easily meet these obligations given the level of current assets of kr222m, with a current ratio of 0.93x. The current ratio is the number you get when you divide current assets by current liabilities.
Does B3 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 65%, B3 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. We can test if B3’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 B3, the ratio of 17.44x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although B3’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for B3’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research B3 Consulting Group to get a more holistic view of the stock by looking at:
- Future Outlook : What are well-informed industry analysts predicting for B3’s future growth? Take a look at our free research report of analyst consensus for B3’s outlook.
- Valuation : What is B3 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 B3 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 firstname.lastname@example.org . 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.