Is Georgia Healthcare Group PLC’s (LON:GHG) Balance Sheet A Threat To Its Future?

Georgia Healthcare Group PLC (LON:GHG) is a small-cap stock with a market capitalization of GEL352.23m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Healthcare industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into GHG here.

How much cash does GHG generate through its operations?

GHG has built up its total debt levels in the last twelve months, from GEL321.09m to GEL367.92m , which comprises of short- and long-term debt. With this rise in debt, GHG’s cash and short-term investments stands at GEL45.67m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of GHG’s operating efficiency ratios such as ROA here.

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

With current liabilities at GEL260.38m, it appears that the company has been able to meet these obligations given the level of current assets of GEL344.17m, with a current ratio of 1.32x. Generally, for Healthcare companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:GHG Historical Debt July 12th 18
LSE:GHG Historical Debt July 12th 18

Can GHG service its debt comfortably?

With debt reaching 66.55% of equity, GHG may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In GHG’s case, the ratio of 3.2x 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:

At its current level of cash flow coverage, GHG has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure GHG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Georgia Healthcare Group to get a better picture of the stock by looking at:

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