Investors are always looking for growth in small-cap stocks like The GO2 People Limited (ASX:GO2), with a market cap of AU$11m. However, an important fact which most ignore is: how financially healthy is the business? Since GO2 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into GO2 here.
How does GO2’s operating cash flow stack up against its debt?
Over the past year, GO2 has ramped up its debt from AU$4.7m to AU$7.0m – this includes both the current and long-term debt. With this growth in debt, GO2 currently has AU$2.7m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. 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 GO2’s operating efficiency ratios such as ROA here.
Can GO2 meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$12m liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$16m, leading to a 1.3x current account ratio. For Professional Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can GO2 service its debt comfortably?
With total debt exceeding equities, GO2 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since GO2 is currently loss-making, 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.
GO2’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. This is only a rough assessment of financial health, and I’m sure GO2 has company-specific issues impacting its capital structure decisions. You should continue to research GO2 People to get a better picture of the stock by looking at:
- Historical Performance: What has GO2’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.
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.
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