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Investors are always looking for growth in small-cap stocks like Lions Gate Entertainment Corp. (NYSE:LGF.A), with a market cap of US$2.9b. However, an important fact which most ignore is: how financially healthy is the business? Given that LGF.A is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into LGF.A here.
Does LGF.A Produce Much Cash Relative To Its Debt?
Over the past year, LGF.A has ramped up its debt from US$2.3b to US$3.2b , which includes long-term debt. With this growth in debt, LGF.A currently has US$106m remaining in cash and short-term investments , ready to be used for running the business. Moreover, LGF.A has produced US$276m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 8.7%, meaning that LGF.A’s debt is not covered by operating cash.
Can LGF.A pay its short-term liabilities?
With current liabilities at US$1.6b, the company may not have an easy time meeting these commitments with a current assets level of US$1.4b, leading to a current ratio of 0.89x. The current ratio is the number you get when you divide current assets by current liabilities.
Is LGF.A’s debt level acceptable?
With debt reaching 98% of equity, LGF.A 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. Though, since LGF.A is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
LGF.A’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how LGF.A has been performing in the past. I recommend you continue to research Lions Gate Entertainment to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LGF.A’s future growth? Take a look at our free research report of analyst consensus for LGF.A’s outlook.
- Valuation: What is LGF.A 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 LGF.A 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.
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 firstname.lastname@example.org. 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.