While small-cap stocks, such as Gulf & Pacific Equities Corp (TSXV:GUF) with its market cap of CA$5.32M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that GUF is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GUF here.
How does GUF’s operating cash flow stack up against its debt?
GUF has sustained its debt level by about CA$24.67M over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at CA$180.22K for investing into the business. Additionally, GUF has produced cash from operations of CA$1.87M over the same time period, resulting in an operating cash to total debt ratio of 7.56%, meaning that GUF’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In GUF’s case, it is able to generate 0.076x cash from its debt capital.
Can GUF pay its short-term liabilities?
Looking at GUF’s most recent CA$5.33M liabilities, 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 0.06x, which is below the prudent industry ratio of 3x.
Does GUF face the risk of succumbing to its debt-load?
GUF is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since GUF is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
GUF’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. 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 GUF has been performing in the past. I recommend you continue to research Gulf & Pacific Equities to get a better picture of the stock by looking at:
- 1. Valuation: What is GUF 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 GUF is currently mispriced by the market.
- 2. Historical Performance: What has GUF’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.