While small-cap stocks, such as Gran Colombia Gold Corp. (TSE:GCM) with its market cap of CA$170m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that GCM is not presently profitable, it’s crucial 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. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into GCM here.
How does GCM’s operating cash flow stack up against its debt?
Over the past year, GCM has reduced its debt from US$94m to US$81m – this includes long-term debt. With this reduction in debt, GCM currently has US$30m remaining in cash and short-term investments for investing into the business. Additionally, GCM has generated US$74m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 91%, indicating that GCM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In GCM’s case, it is able to generate 0.91x cash from its debt capital.
Can GCM meet its short-term obligations with the cash in hand?
Looking at GCM’s US$63m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$69m, with a current ratio of 1.1x. Usually, for Metals and Mining companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can GCM service its debt comfortably?
With debt at 31% of equity, GCM may be thought of as appropriately levered. GCM is not taking on too much debt commitment, which may be constraining for future growth. GCM's risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
GCM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 GCM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Gran Colombia Gold to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GCM’s future growth? Take a look at our free research report of analyst consensus for GCM’s outlook.
- Valuation: What is GCM 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 GCM is currently mispriced by the market.
- 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.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.