Galane Gold Ltd. (CVE:GG) is a small-cap stock with a market capitalization of CA$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. Why is it important? 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. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into GG here.
Does GG produce enough cash relative to debt?
GG has shrunken its total debt levels in the last twelve months, from US$16m to US$15m , which also accounts for long term debt. With this reduction in debt, GG currently has US$3.1m remaining in cash and short-term investments for investing into the business. On top of this, GG has produced US$6.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 42%, meaning that GG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GG’s case, it is able to generate 0.42x cash from its debt capital.
Does GG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$10m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.83x.
Is GG’s debt level acceptable?
Since total debt levels have outpaced equities, GG is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if GG’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 GG, the ratio of 20.02x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as GG’s high interest coverage is seen as responsible and safe practice.
GG’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how GG has been performing in the past. I recommend you continue to research Galane Gold to get a better picture of the stock by looking at:
- Valuation: What is GG 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 GG is currently mispriced by the market.
- Historical Performance: What has GG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.