Gulfsands Petroleum plc (AIM:GPX) is a small-cap stock with a market capitalization of GBP £35.10M. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Gulfsands Petroleum
Does GPX generate an acceptable amount of cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These catastrophes does not mean the company can stop servicing its debt obligations. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of GPX, operating cash flow turned out to be -1.37x its debt level over the past twelve months. This means what GPX can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at GPX’s operations at this point in time.
Can GPX pay its short-term liabilities?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, GPX may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that GPX is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Can GPX service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For GPX, the debt-to-equity ratio is 3.49%, which means debt is low and does not pose any significant threat to the company’s operations.
Are you a shareholder? GPX’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. I recommend researching market expectations for GPX’s future growth on our free analysis platform.
Are you a potential investor? GPX appears to have maintained a sensible level of debt, which means there’s still some headroom to grow debt funding. But its current cash flow coverage of existing debt, along with its low liquidity, is concerning. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of GPX’s track record. I encourage you to continue your research by taking a look at GPX’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.