Is Genesis Land Development Corp.'s (TSE:GDC) Balance Sheet A Threat To Its Future?

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Investors are always looking for growth in small-cap stocks like Genesis Land Development Corp. (TSE:GDC), with a market cap of CA$130m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into GDC here.

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

Over the past year, GDC has reduced its debt from CA$35m to CA$27m – this includes long-term debt. With this debt payback, GDC's cash and short-term investments stands at CA$15m , ready to deploy into the business. On top of this, GDC has produced CA$35m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 131%, signalling that GDC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GDC’s case, it is able to generate 1.31x cash from its debt capital.

Can GDC meet its short-term obligations with the cash in hand?

At the current liabilities level of CA$32m, it appears that the company has been able to meet these commitments with a current assets level of CA$269m, leading to a 8.51x current account ratio. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

Is GDC’s debt level acceptable?

With debt at 13% of equity, GDC may be thought of as appropriately levered. This range is considered safe as GDC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether GDC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GDC's, case, the ratio of 65.72x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

GDC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure GDC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Genesis Land Development to get a better picture of the stock by looking at:

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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.