What Investors Should Know About Gateway Lifestyle Group’s (ASX:GTY) Financial Strength
Investors are always looking for growth in small-cap stocks like Gateway Lifestyle Group (ASX:GTY), with a market cap of AU$601.23M. However, an important fact which most ignore is: how financially healthy is the business? 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 few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into GTY here.
Does GTY generate enough cash through operations?
GTY’s debt levels surged from AU$103.45M to AU$178.42M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, GTY’s cash and short-term investments stands at AU$22.59M , ready to deploy into the business. Moreover, GTY has generated cash from operations of AU$31.74M over the same time period, leading to an operating cash to total debt ratio of 17.79%, signalling that GTY’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GTY’s case, it is able to generate 0.18x cash from its debt capital.
Can GTY meet its short-term obligations with the cash in hand?
With current liabilities at AU$50.18M, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.96x, which is below the prudent industry ratio of 3x.
Does GTY face the risk of succumbing to its debt-load?
GTY’s level of debt is appropriate relative to its total equity, at 32.81%. This range is considered safe as GTY is not taking on too much debt obligation, which may be constraining for future growth. We can test if GTY’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 GTY, the ratio of 9.43x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GTY’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although GTY’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how GTY has been performing in the past. I suggest you continue to research Gateway Lifestyle Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GTY’s future growth? Take a look at our free research report of analyst consensus for GTY’s outlook.
Valuation: What is GTY 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 GTY 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 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.
