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Are Generac Holdings Inc.'s (NYSE:GNRC) Interest Costs Too High?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Generac Holdings Inc. (NYSE:GNRC), with a market cap of US$4.5b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into GNRC here.

Does GNRC Produce Much Cash Relative To Its Debt?

GNRC has sustained its debt level by about US$971m over the last 12 months – this includes long-term debt. At this stable level of debt, GNRC's cash and short-term investments stands at US$161m to keep the business going. Additionally, GNRC has generated cash from operations of US$233m during the same period of time, leading to an operating cash to total debt ratio of 24%, signalling that GNRC’s operating cash is sufficient to cover its debt.

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

At the current liabilities level of US$516m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 2.06x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electrical companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:GNRC Historical Debt, July 17th 2019

Can GNRC service its debt comfortably?

Since total debt levels exceed equity, GNRC is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether GNRC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GNRC's, case, the ratio of 9.62x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GNRC ample headroom to grow its debt facilities.

Next Steps:

GNRC’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 GNRC has been performing in the past. I recommend you continue to research Generac Holdings to get a more holistic view of the small-cap by looking at:

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