Is GYG plc's (LON:GYG) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like GYG plc (LON:GYG), with a market cap of UK£33m. However, an important fact which most ignore is: how financially healthy is the business? Given that GYG is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into GYG here.

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GYG’s Debt (And Cash Flows)

Over the past year, GYG has reduced its debt from €13m to €12m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €5.1m , ready to be used for running the business. On top of this, GYG has produced €2.8m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24%, signalling that GYG’s operating cash is sufficient to cover its debt.

Does GYG’s liquid assets cover its short-term commitments?

Looking at GYG’s €21m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of €15m, with a current ratio of 0.69x. The current ratio is the number you get when you divide current assets by current liabilities.

Can GYG service its debt comfortably?

GYG is a relatively highly levered company with a debt-to-equity of 93%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since GYG is presently loss-making, 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:

Although GYG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for GYG's financial health. Other important fundamentals need to be considered alongside. You should continue to research GYG to get a more holistic view of the stock by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.