Investors are always looking for growth in small-cap stocks like Good Life Networks Inc. (CVE:GOOD), with a market cap of CA$27m. However, an important fact which most ignore is: how financially healthy is the business? Given that GOOD is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into GOOD here.
GOOD’s Debt (And Cash Flows)
GOOD’s debt levels surged from CA$3.0m to CA$11m over the last 12 months , which includes long-term debt. With this increase in debt, GOOD’s cash and short-term investments stands at CA$781k , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of GOOD’s operating efficiency ratios such as ROA here.
Can GOOD pay its short-term liabilities?
With current liabilities at CA$17m, it seems that the business has been able to meet these obligations given the level of current assets of CA$22m, with a current ratio of 1.29x. The current ratio is calculated by dividing current assets by current liabilities. For Media companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is GOOD’s debt level acceptable?
Since total debt levels exceed equity, GOOD is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since GOOD is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
GOOD’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around GOOD’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how GOOD has been performing in the past. You should continue to research Good Life Networks to get a better picture of the small-cap by looking at:
- Historical Performance: What has GOOD’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.
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