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Investors are always looking for growth in small-cap stocks like Golden Queen Mining Co. Ltd. (TSE:GQM), with a market cap of CA$7.5m. However, an important fact which most ignore is: how financially healthy is the business? Given that GQM is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into GQM here.
GQM’s Debt (And Cash Flows)
GQM has built up its total debt levels in the last twelve months, from US$42m to US$46m – this includes long-term debt. With this increase in debt, GQM's cash and short-term investments stands at US$5.7m , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of GQM’s operating efficiency ratios such as ROA here.
Does GQM’s liquid assets cover its short-term commitments?
At the current liabilities level of US$55m, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$39m, with a current ratio of 0.72x. The current ratio is calculated by dividing current assets by current liabilities.
Does GQM face the risk of succumbing to its debt-load?
With debt reaching 41% of equity, GQM may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since GQM 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.
Although GQM’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though 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 GQM has been performing in the past. I suggest you continue to research Golden Queen Mining to get a better picture of the stock by looking at:
Historical Performance: What has GQM'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.
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.