Yahoo Finance Is Babcock International Group PLC (LON:BAB) A Financially Sound Company?
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While small-cap stocks, such as Babcock International Group PLC (LON:BAB) with its market cap of UK£2.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into BAB here.
Does BAB Produce Much Cash Relative To Its Debt?
Over the past year, BAB has reduced its debt from UK£1.5b to UK£1.4b – this includes long-term debt. With this debt repayment, BAB currently has UK£275m remaining in cash and short-term investments to keep the business going. Additionally, BAB has produced UK£386m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 27%, indicating that BAB’s debt is appropriately covered by operating cash.
Can BAB meet its short-term obligations with the cash in hand?
Looking at BAB’s UK£1.5b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of UK£1.4b, with a current ratio of 0.94x. The current ratio is the number you get when you divide current assets by current liabilities.
Can BAB service its debt comfortably?
With debt reaching 49% of equity, BAB may be thought of as relatively highly levered. 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 BAB’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 BAB, the ratio of 11.42x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as BAB’s high interest coverage is seen as responsible and safe practice.
Next Steps:
BAB’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 BAB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Babcock International Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for BAB’s future growth? Take a look at our free research report of analyst consensus for BAB’s outlook.
Valuation: What is BAB 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 BAB 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 editorial-team@simplywallst.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.
