While small-cap stocks, such as Gyrodyne LLC (NASDAQ:GYRO) with its market cap of USD $31.94M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Gyrodyne
Does GYRO generate an acceptable amount of cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. 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. GYRO’s recent operating cash flow was -0.19 times its debt within the past year. This means what GYRO 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 GYRO’s operations at this point in time.
Does GYRO’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, GYRO 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 GYRO does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can GYRO service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. GYRO’s debt-to-equity ratio stands at 69.24%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.
Are you a shareholder? GYRO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that GYRO’s financial situation may change. You should always be keeping abreast of market expectations for GYRO’s future growth on our free analysis platform.
Are you a potential investor? Although short-term liquidity isn’t an issue, GYRO’s high debt levels along with poor cash coverage may not be what you’re after in an investment. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of GYRO’s track record. As a following step, you should take a look at GYRO’s past performance analysis on our free platform to figure out GYRO’s financial health position.