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Is C&C Group plc's (ISE:GCC) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Investors are always looking for growth in small-cap stocks like C&C Group plc (ISE:GCC), with a market cap of €1.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into GCC here.

GCC’s Debt (And Cash Flows)

GCC's debt levels surged from €391m to €523m over the last 12 months – this includes long-term debt. With this rise in debt, GCC currently has €242m remaining in cash and short-term investments , ready to be used for running the business. Moreover, GCC has produced €102m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 20%, signalling that GCC’s debt is not covered by operating cash.

Does GCC’s liquid assets cover its short-term commitments?

At the current liabilities level of €532m, it appears that the company has been able to meet these obligations given the level of current assets of €699m, with a current ratio of 1.31x. The current ratio is the number you get when you divide current assets by current liabilities. For Beverage companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ISE:GCC Historical Debt, April 22nd 2019

Is GCC’s debt level acceptable?

With debt reaching 94% of equity, GCC 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. 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 GCC's case, the ratio of 11.28x 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.

Next Steps:

Although GCC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure GCC has company-specific issues impacting its capital structure decisions. I suggest you continue to research C&C Group to get a more holistic view of the small-cap by looking at:

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

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.