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Gates Industrial Corporation plc (NYSE:GTES) is a small-cap stock with a market capitalization of US$4.3b. 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? Understanding the company’s financial health becomes 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, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into GTES here.
Does GTES Produce Much Cash Relative To Its Debt?
GTES’s debt levels have fallen from US$4.0b to US$3.0b over the last 12 months , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$427m to keep the business going. Additionally, GTES has produced cash from operations of US$314m over the same time period, resulting in an operating cash to total debt ratio of 10%, meaning that GTES’s operating cash is less than its debt.
Does GTES’s liquid assets cover its short-term commitments?
With current liabilities at US$679m, it seems that the business has been able to meet these commitments with a current assets level of US$1.8b, leading to a 2.67x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is GTES’s debt level acceptable?
Since total debt levels exceed equity, GTES 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. We can check to see whether GTES is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GTES’s, case, the ratio of 2.97x 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.
GTES’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure GTES has company-specific issues impacting its capital structure decisions. You should continue to research Gates Industrial to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GTES’s future growth? Take a look at our free research report of analyst consensus for GTES’s outlook.
- Valuation: What is GTES 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 GTES 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 email@example.com. 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.