GB Group plc (AIM:GBG): Time For A Financial Health Check
GB Group plc (AIM:GBG) is a small-cap stock with a market capitalization of GBP £579.52M. 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? Companies operating in the software industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. 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 suggest you dig deeper yourself into GBG here.
Does GBG generate enough cash through operations?
GBG has built up its total debt levels in the last twelve months, from £4M to £12M , which is made up of current and long term debt. With this increase in debt, GBG’s cash and short-term investments stands at £18M for investing into the business. Moreover, GBG has generated cash from operations of £14M over the same time period, leading to an operating cash to total debt ratio of 1.14x, meaning that GBG’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 GBG’s case, it is able to generate 1.14x cash from its debt capital.
Does GBG’s liquid assets cover its short-term commitments?
At the current liabilities level of £44M liabilities, it seems that the business has been able to meet these commitments with a current assets level of £49M, leading to a 1.1x current account ratio. For software companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can GBG service its debt comfortably?
With debt at 13.15% of equity, GBG may be thought of as appropriately levered. GBG is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
Are you a shareholder? GBG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, its financial position may change. You should always be keeping abreast of market expectations for GBG’s future growth on our free analysis platform.
Are you a potential investor? Although GBG’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more confidence in the stock, you need to also analyse GBG’s track record. I encourage you to continue your research by taking a look at GBG’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.
