Investors are always looking for growth in small-cap stocks like Chart Industries, Inc. (NASDAQ:GTLS), with a market cap of US$2.7b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into GTLS here.
GTLS’s Debt (And Cash Flows)
Over the past year, GTLS has maintained its debt levels at around US$533m including long-term debt. At this constant level of debt, GTLS currently has US$72m remaining in cash and short-term investments , ready to be used for running the business. Moreover, GTLS has produced cash from operations of US$33m over the same time period, resulting in an operating cash to total debt ratio of 6.1%, meaning that GTLS’s debt is not covered by operating cash.
Can GTLS pay its short-term liabilities?
With current liabilities at US$579m, it seems that the business has been able to meet these commitments with a current assets level of US$645m, leading to a 1.11x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does GTLS face the risk of succumbing to its debt-load?
GTLS is a relatively highly levered company with a debt-to-equity of 60%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 GTLS's case, the ratio of 4.53x 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.
Although GTLS’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. Since there is also no concerns around GTLS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for GTLS's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Chart Industries to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GTLS’s future growth? Take a look at our free research report of analyst consensus for GTLS’s outlook.
- Valuation: What is GTLS 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 GTLS 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.
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