While small-cap stocks, such as Big Lots, Inc. ( NYSE:BIG ) with its market cap of US$1.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to 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 suggest you dig deeper yourself into BIG here .
BIG’s Debt (And Cash Flows)
BIG has built up its total debt levels in the last twelve months, from US$215m to US$519m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$46m , ready to be used for running the business. Moreover, BIG has generated US$234m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 45%, signalling that BIG’s operating cash is sufficient to cover its debt.
Can BIG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$639m, it appears that the company has been able to meet these commitments with a current assets level of US$1.1b, leading to a 1.77x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Multiline Retail companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BIG’s debt level acceptable?
BIG is a relatively highly levered company with a debt-to-equity of 75%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BIG's case, the ratio of 21.49x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as BIG’s high interest coverage is seen as responsible and safe practice.
BIG’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how BIG has been performing in the past. I recommend you continue to research Big Lots to get a more holistic view of the small-cap by looking at:
- Future Outlook : What are well-informed industry analysts predicting for BIG’s future growth? Take a look at our free research report of analyst consensus for BIG’s outlook.
- Valuation : What is BIG 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 BIG 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.