C&C Group plc (ISE:GCC) is a small-cap stock with a market capitalization of €1.08b. 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? Evaluating financial health as part of your investment thesis 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into GCC here.
Does GCC produce enough cash relative to debt?
Over the past year, GCC has ramped up its debt from €358.6m to €383.5m , which comprises of short- and long-term debt. With this rise in debt, GCC’s cash and short-term investments stands at €145.5m , ready to deploy into the business. On top of this, GCC has generated cash from operations of €76.3m during the same period of time, leading to an operating cash to total debt ratio of 19.9%, indicating that GCC’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GCC’s case, it is able to generate 0.2x cash from its debt capital.
Can GCC meet its short-term obligations with the cash in hand?
With current liabilities at €145.2m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.16x. For Beverage companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can GCC service its debt comfortably?
GCC is a relatively highly levered company with a debt-to-equity of 71.9%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether GCC 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 GCC’s, case, the ratio of 12.07x suggests that interest is comfortably 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.
GCC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how GCC has been performing in the past. I suggest you continue to research C&C Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GCC’s future growth? Take a look at our free research report of analyst consensus for GCC’s outlook.
- Valuation: What is GCC 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 GCC 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 past 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. For errors that warrant correction please contact the editor at email@example.com.