Mid-caps stocks, like GVC Holdings PLC (LON:GVC) with a market capitalization of UK£4.2b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at GVC’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of GVC Holdings’s financial health, so you should conduct further analysis into GVC here.
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Does GVC produce enough cash relative to debt?
GVC’s debt levels surged from UK£218m to UK£2.2b over the last 12 months – this includes long-term debt. With this rise in debt, GVC currently has UK£479m remaining in cash and short-term investments for investing into the business. Additionally, GVC has generated UK£153m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 6.9%, meaning that GVC’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GVC’s case, it is able to generate 0.069x cash from its debt capital.
Can GVC meet its short-term obligations with the cash in hand?
Looking at GVC’s UK£1.0b in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£844m, leading to a current ratio of 0.84x.
Does GVC face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 59%, GVC can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if GVC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GVC, the ratio of 3.7x suggests that interest is appropriately 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:
Although GVC’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven’t considered other factors such as how GVC has been performing in the past. I suggest you continue to research GVC Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GVC’s future growth? Take a look at our free research report of analyst consensus for GVC’s outlook.
- Valuation: What is GVC 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 GVC is currently mispriced by the market.
- 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.