The Greenbrier Companies, Inc. (NYSE:GBX) is a small-cap stock with a market capitalization of US$1.3b. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GBX here.
How does GBX’s operating cash flow stack up against its debt?
GBX’s debt levels have fallen from US$563m to US$464m over the last 12 months , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$531m , ready to deploy into the business. Additionally, GBX has produced US$103m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 22%, signalling that GBX’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GBX’s case, it is able to generate 0.22x cash from its debt capital.
Can GBX meet its short-term obligations with the cash in hand?
At the current liabilities level of US$478m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 3.09x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can GBX service its debt comfortably?
With a debt-to-equity ratio of 33%, GBX’s debt level may be seen as prudent. This range is considered safe as GBX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if GBX’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 GBX, the ratio of 6.74x 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.
GBX’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure GBX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Greenbrier Companies to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GBX’s future growth? Take a look at our free research report of analyst consensus for GBX’s outlook.
- Valuation: What is GBX 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 GBX 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.
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 firstname.lastname@example.org.