While small-cap stocks, such as The GO2 People Limited (ASX:GO2) with its market cap of AU$14.75m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since GO2 is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into GO2 here.
Does GO2 produce enough cash relative to debt?
GO2’s debt levels surged from AU$4.67m to AU$5.71m over the last 12 months , which is made up of current and long term debt. With this rise in debt, GO2’s cash and short-term investments stands at AU$4.93m 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.
Does GO2’s liquid assets cover its short-term commitments?
With current liabilities at AU$10.55m, the company has been able to meet these obligations given the level of current assets of AU$14.76m, with a current ratio of 1.4x. Usually, for Professional Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does GO2 face the risk of succumbing to its debt-load?Since total debt levels have outpaced equities, GO2 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since GO2 is presently unprofitable, 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. Though, 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 more holistic view of the stock by looking at:
- Valuation: What is GO2 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 GO2 is currently mispriced by the market.
- 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.