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Is The Go-Ahead Group plc’s (LON:GOG) Balance Sheet Strong Enough To Weather A Storm?

The Go-Ahead Group plc (LON:GOG) is a small-cap stock with a market capitalization of UK£674m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into GOG here.

How does GOG’s operating cash flow stack up against its debt?

Over the past year, GOG has ramped up its debt from UK£359m to UK£403m , which includes long-term debt. With this increase in debt, GOG currently has UK£567m remaining in cash and short-term investments , ready to deploy into the business. Additionally, GOG has produced UK£162m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 40%, indicating that GOG’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GOG’s case, it is able to generate 0.4x cash from its debt capital.

Can GOG meet its short-term obligations with the cash in hand?

At the current liabilities level of UK£863m, it appears that the company has been able to meet these obligations given the level of current assets of UK£938m, with a current ratio of 1.09x. Usually, for Transportation companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:GOG Historical Debt November 26th 18

Does GOG face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, GOG is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if GOG’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 GOG, the ratio of 9.5x suggests that interest is appropriately 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.

Next Steps:

GOG’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. Since there is also no concerns around GOG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure GOG has company-specific issues impacting its capital structure decisions. You should continue to research Go-Ahead Group to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GOG’s future growth? Take a look at our free research report of analyst consensus for GOG’s outlook.
  2. Valuation: What is GOG 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 GOG is currently mispriced by the market.
  3. 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.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.