While small-cap stocks, such as Genesis Land Development Corp. (TSE:GDC) with its market cap of CA$130m, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into GDC here.
Does GDC produce enough cash relative to debt?
GDC has shrunken its total debt levels in the last twelve months, from CA$35m to CA$27m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at CA$15m , ready to deploy into the business. Moreover, GDC has generated cash from operations of CA$35m over the same time period, resulting in an operating cash to total debt ratio of 131%, indicating that GDC’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GDC’s case, it is able to generate 1.31x cash from its debt capital.
Does GDC’s liquid assets cover its short-term commitments?
With current liabilities at CA$32m, it appears that the company has been able to meet these obligations given the level of current assets of CA$269m, with a current ratio of 8.51x. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can GDC service its debt comfortably?
With debt at 13% of equity, GDC may be thought of as appropriately levered. This range is considered safe as GDC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if GDC’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 GDC, the ratio of 65.72x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving GDC ample headroom to grow its debt facilities.
GDC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure GDC has company-specific issues impacting its capital structure decisions. You should continue to research Genesis Land Development to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GDC’s future growth? Take a look at our free research report of analyst consensus for GDC’s outlook.
- Valuation: What is GDC 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 GDC is currently mispriced by the market.
- 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 firstname.lastname@example.org.