Is Grafenia Plc’s (LON:GRA) Balance Sheet Strong Enough To Weather A Storm?

While small-cap stocks, such as Grafenia Plc (AIM:GRA) with its market cap of UK£5.71M, 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 GRA is not presently profitable, it’s crucial to assess 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GRA here.

Does GRA generate enough cash through operations?

Over the past year, GRA has reduced its debt from UK£330.00K to UK£299.00K , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£524.00K , ready to deploy into the business. Moreover, GRA has produced cash from operations of UK£844.00K in the last twelve months, leading to an operating cash to total debt ratio of 282.27%, meaning that GRA’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In GRA’s case, it is able to generate 2.82x cash from its debt capital.

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

Looking at GRA’s most recent UK£1.96M liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£3.42M, leading to a 1.74x current account ratio. Generally, for Commercial Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

AIM:GRA Historical Debt Apr 11th 18
AIM:GRA Historical Debt Apr 11th 18

Does GRA face the risk of succumbing to its debt-load?

GRA is a relatively highly levered company with a debt-to-equity of 79.16%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since GRA 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.

Next Steps:

Although GRA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around GRA’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 GRA has been performing in the past. I recommend you continue to research Grafenia to get a more holistic view of the small-cap by looking at: