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Investors are always looking for growth in small-cap stocks like Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD), with a market cap of US$690m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into GLDD here.
Does GLDD Produce Much Cash Relative To Its Debt?
GLDD's debt level has been constant at around US$399m over the previous year which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at US$123m to keep the business going. On top of this, GLDD has produced cash from operations of US$241m during the same period of time, leading to an operating cash to total debt ratio of 61%, signalling that GLDD’s operating cash is sufficient to cover its debt.
Can GLDD meet its short-term obligations with the cash in hand?
Looking at GLDD’s US$198m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$251m, with a current ratio of 1.27x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is GLDD’s debt level acceptable?
Since total debt levels exceed equity, GLDD 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GLDD's case, the ratio of 2.94x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although GLDD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for GLDD's financial health. Other important fundamentals need to be considered alongside. You should continue to research Great Lakes Dredge & Dock to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GLDD’s future growth? Take a look at our free research report of analyst consensus for GLDD’s outlook.
- Valuation: What is GLDD 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 GLDD 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.
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 firstname.lastname@example.org. 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.