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Is Genco Shipping & Trading Limited's (NYSE:GNK) Balance Sheet Strong Enough To Weather A Storm?

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  • GNK

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While small-cap stocks, such as Genco Shipping & Trading Limited (NYSE:GNK) with its market cap of US$368m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since GNK is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into GNK here.

GNK’s Debt (And Cash Flows)

Over the past year, GNK has maintained its debt levels at around US$539m including long-term debt. At this current level of debt, GNK currently has US$197m remaining in cash and short-term investments to keep the business going. Moreover, GNK has produced US$66m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 12%, indicating that GNK’s current level of operating cash is not high enough to cover debt.

Does GNK’s liquid assets cover its short-term commitments?

At the current liabilities level of US$102m, the company has been able to meet these commitments with a current assets level of US$270m, leading to a 2.65x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Shipping companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:GNK Historical Debt, May 8th 2019
NYSE:GNK Historical Debt, May 8th 2019

Is GNK’s debt level acceptable?

GNK is a relatively highly levered company with a debt-to-equity of 51%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since GNK is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

GNK’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how GNK has been performing in the past. I recommend you continue to research Genco Shipping & Trading to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GNK’s future growth? Take a look at our free research report of analyst consensus for GNK’s outlook.

  2. Valuation: What is GNK 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 GNK is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.com. 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.