While small-cap stocks, such as Genesis Energy Limited (NZSE:GNE) with its market cap of NZ$2.28B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 GNE here.
How does GNE’s operating cash flow stack up against its debt?
Over the past year, GNE has ramped up its debt from NZ$912.20M to NZ$1.26B – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at NZ$27.80M , ready to deploy into the business. Additionally, GNE has generated NZ$248.50M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19.73%, signalling that GNE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GNE’s case, it is able to generate 0.2x cash from its debt capital.
Can GNE pay its short-term liabilities?
With current liabilities at NZ$228.10M, it seems that the business has been able to meet these obligations given the level of current assets of NZ$372.00M, with a current ratio of 1.63x. For Electric Utilities 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.
Is GNE’s debt level acceptable?
GNE is a relatively highly levered company with a debt-to-equity of 64.25%. 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 GNE’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 GNE, the ratio of 2.71x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as GNE’s low interest coverage already puts the company at higher risk of default.
At its current level of cash flow coverage, GNE has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how GNE has been performing in the past. I recommend you continue to research Genesis Energy to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for GNE’s future growth? Take a look at our free research report of analyst consensus for GNE’s outlook.
- 2. Valuation: What is GNE 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 GNE 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.
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.