What does Gateway Lifestyle Group’s (ASX:GTY) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as Gateway Lifestyle Group (ASX:GTY) with its market cap of AU$590.66M, 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 crucial, 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GTY here.

How does GTY’s operating cash flow stack up against its debt?

Over the past year, GTY has ramped up its debt from AU$103.45M to AU$178.42M , which comprises of short- and long-term debt. With this growth in debt, GTY’s cash and short-term investments stands at AU$22.59M for investing into the business. Moreover, GTY has produced AU$31.74M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 17.79%, indicating that GTY’s current level of operating cash is not high enough to cover debt. 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 0.18x cash from its debt capital.

Can GTY pay its short-term liabilities?

At the current liabilities level of AU$50.18M liabilities, the company has not been able to meet these commitments with a current assets level of AU$48.28M, leading to a 0.96x current account ratio. which is under the appropriate industry ratio of 3x.

ASX:GTY Historical Debt Apr 5th 18
ASX:GTY Historical Debt Apr 5th 18

Is GTY’s debt level acceptable?

With debt at 32.81% of equity, GTY may be thought of as appropriately levered. This range is considered safe as GTY is not taking on too much debt obligation, 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 debtors may be willing to loan the company more money, giving GTY ample headroom to grow its debt facilities.

Next Steps:

GTY’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how GTY has been performing in the past. I suggest you continue to research Gateway Lifestyle Group to get a more holistic view of the stock by looking at: