Is Gateway Lifestyle Group’s (ASX:GTY) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Gateway Lifestyle Group (ASX:GTY), with a market cap of AU$695.37m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into GTY here.

Does GTY produce enough cash relative to debt?

GTY has built up its total debt levels in the last twelve months, from AU$138.50m to AU$198.79m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$8.12m for investing into the business. Moreover, GTY has produced cash from operations of AU$24.38m during the same period of time, resulting in an operating cash to total debt ratio of 12.27%, indicating that GTY’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GTY’s case, it is able to generate 0.12x cash from its debt capital.

Can GTY pay its short-term liabilities?

With current liabilities at AU$33.56m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.78x. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ASX:GTY Historical Debt July 18th 18
ASX:GTY Historical Debt July 18th 18

Does GTY face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 32.81%, GTY’s debt level may be seen as prudent. GTY is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if GTY’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 GTY, the ratio of 9.43x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GTY’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although GTY’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. 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 GTY has company-specific issues impacting its capital structure decisions. I recommend you continue to research Gateway Lifestyle Group to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GTY’s future growth? Take a look at our free research report of analyst consensus for GTY’s outlook.
  2. Valuation: What is GTY 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 GTY 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.