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Groupon, Inc. (NASDAQ:GRPN) is a small-cap stock with a market capitalization of US$2.0b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that GRPN is not presently profitable, it’s crucial 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. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into GRPN here.
GRPN’s Debt (And Cash Flows)
Over the past year, GRPN has ramped up its debt from US$230m to US$369m – this includes long-term debt. With this growth in debt, GRPN currently has US$646m remaining in cash and short-term investments , ready to be used for running the business. Moreover, GRPN has generated cash from operations of US$163m over the same time period, resulting in an operating cash to total debt ratio of 44%, signalling that GRPN’s current level of operating cash is high enough to cover debt.
Can GRPN meet its short-term obligations with the cash in hand?
With current liabilities at US$794m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Online Retail companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does GRPN face the risk of succumbing to its debt-load?
With debt reaching 67% of equity, GRPN may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since GRPN is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although GRPN’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 GRPN's financial health. Other important fundamentals need to be considered alongside. You should continue to research Groupon to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GRPN’s future growth? Take a look at our free research report of analyst consensus for GRPN’s outlook.
- Valuation: What is GRPN 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 GRPN 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.