While small-cap stocks, such as GVIC Communications Corp (TSE:GCT) with its market cap of CA$39.35m, 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 GCT is loss-making right now, it’s crucial 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into GCT here.
How does GCT’s operating cash flow stack up against its debt?
Over the past year, GCT has reduced its debt from CA$104.98m to CA$95.25m – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CA$0 for investing into the business. Moreover, GCT has produced CA$12.87m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13.52%, indicating that GCT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In GCT’s case, it is able to generate 0.14x cash from its debt capital.
Can GCT pay its short-term liabilities?
At the current liabilities level of CA$39.85m liabilities, the company has not been able to meet these commitments with a current assets level of CA$39.76m, leading to a 1x current account ratio. which is under the appropriate industry ratio of 3x.
Can GCT service its debt comfortably?With debt reaching 97.28% of equity, GCT may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since GCT is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
GCT’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how GCT has been performing in the past. I recommend you continue to research GVIC Communications to get a more holistic view of the stock by looking at:
- Valuation: What is GCT 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 GCT is currently mispriced by the market.
- Historical Performance: What has GCT’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.