Investors are always looking for growth in small-cap stocks like Public Joint Stock Company “Cherkizovo Group” (MISX:GCHE), with a market cap of RUРУБ52.75B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into GCHE here.
Does GCHE generate an acceptable amount of cash through operations?
GCHE’s debt levels surged from RUРУБ38.59B to RUРУБ50.01B over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at RUРУБ704.68M for investing into the business. Moreover, GCHE has produced cash from operations of RUРУБ13.02B in the last twelve months, leading to an operating cash to total debt ratio of 26.02%, indicating that GCHE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GCHE’s case, it is able to generate 0.26x cash from its debt capital.
Does GCHE’s liquid assets cover its short-term commitments?
Looking at GCHE’s most recent RUРУБ34.14B liabilities, it appears that the company has not been able to meet these commitments with a current assets level of RUРУБ31.74B, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Does GCHE face the risk of succumbing to its debt-load?
With debt reaching 94.76% of equity, GCHE may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In GCHE’s case, the ratio of 3.02x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
GCHE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for GCHE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cherkizovo Group to get a more holistic view of the stock by looking at:
- 1. Valuation: What is GCHE 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 GCHE is currently mispriced by the market.
- 2. Historical Performance: What has GCHE’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.