Investors are always looking for growth in small-cap stocks like Gevo Inc (NASDAQ:GEVO), with a market cap of USD $10.21M. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for GEVO
Does GEVO generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of GEVO, operating cash flow turned out to be -1.52x its debt level over the past twelve months. This means what GEVO can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at GEVO’s operations at this point in time.
Does GEVO’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, GEVO could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that GEVO is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is GEVO’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For GEVO, the debt-to-equity ratio is 20.52%, which means its debt level does not pose a threat to its operations right now.
Are you a shareholder? GEVO’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I suggest keeping on top of market expectations for GEVO’s future growth on our free analysis platform.
Are you a potential investor? Gevo currently has financial flexibility to ramp up growth in the future. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to also analyse GEVO’s track record. As a following step, you should take a look at GEVO’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.