What does Gear4Music (Holdings) Plc's (LON:G4M) Balance Sheet Tell Us About Its Future?

Gear4Music (Holdings) Plc (LON:G4M) is a small-cap stock with a market capitalization of UK£151.23m. 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 Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into G4M here.

Does G4M produce enough cash relative to debt?

G4M's debt levels surged from UK£2.65m to UK£8.53m over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£3.54m , ready to deploy into the business. Moreover, G4M has generated cash from operations of UK£157.00k in the last twelve months, leading to an operating cash to total debt ratio of 1.84%, meaning that G4M’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In G4M’s case, it is able to generate 0.018x cash from its debt capital.

Does G4M’s liquid assets cover its short-term commitments?

With current liabilities at UK£14.83m, the company has been able to meet these commitments with a current assets level of UK£23.30m, leading to a 1.57x current account ratio. For Specialty Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does G4M face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 45.17%, G4M can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if G4M’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 G4M, the ratio of 11.05x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving G4M ample headroom to grow its debt facilities.

Next Steps:

G4M’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how G4M has been performing in the past. I suggest you continue to research Gear4Music (Holdings) to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for G4M’s future growth? Take a look at our free research report of analyst consensus for G4M’s outlook.
2. Valuation: What is G4M 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 G4M 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.

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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.