While small-cap stocks, such as Gaming Realms plc (LON:GMR) with its market cap of UK£23.4m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into GMR here.
How much cash does GMR generate through its operations?
GMR has increased its debt level by about UK£3.8m over the last 12 months made up of current and long term debt. With this growth in debt, GMR’s cash and short-term investments stands at UK£2.3m for investing into the business. Additionally, GMR has generated cash from operations of UK£1.0m in the last twelve months, resulting in an operating cash to total debt ratio of 27.4%, indicating that GMR’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In GMR’s case, it is able to generate 0.27x cash from its debt capital.
Does GMR’s liquid assets cover its short-term commitments?
Looking at GMR’s most recent UK£9.3m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of UK£8.3m, leading to a 0.9x current account ratio. which is under the appropriate industry ratio of 3x.
Is GMR’s debt level acceptable?
GMR’s level of debt is appropriate relative to its total equity, at 23.1%. This range is considered safe as GMR is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with GMR, and the company has plenty of headroom and ability to raise debt should it need to in the future.
GMR’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure GMR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Gaming Realms to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GMR’s future growth? Take a look at our free research report of analyst consensus for GMR’s outlook.
- Historical Performance: What has GMR’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 email@example.com.