While small-cap stocks, such as Global Construction Services Limited (ASX:GCS) with its market cap of AU$151.94M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GCS here.
Does GCS generate an acceptable amount of cash through operations?
Over the past year, GCS has reduced its debt from AU$34.53M to AU$27.39M made up of predominantly near term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$31.17M , ready to deploy into the business. Moreover, GCS has generated cash from operations of AU$19.12M during the same period of time, resulting in an operating cash to total debt ratio of 69.78%, signalling that GCS’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GCS’s case, it is able to generate 0.7x cash from its debt capital.
Can GCS pay its short-term liabilities?
At the current liabilities level of AU$38.00M liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$82.10M, leading to a 2.16x current account ratio. Generally, for Construction companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can GCS service its debt comfortably?GCS’s level of debt is low relative to its total equity, at 1.56%. GCS is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if GCS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GCS, the ratio of 8.88x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GCS’s high interest coverage is seen as responsible and safe practice.
GCS’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure GCS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Global Construction Services to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for GCS’s future growth? Take a look at our free research report of analyst consensus for GCS’s outlook.
- 2. Valuation: What is GCS 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 GCS is currently mispriced by the market.
- 3. 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.