While small-cap stocks, such as Green Landscaping Holding AB (publ) (STO:GREEN) with its market cap of kr1.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since GREEN is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into GREEN here.
How does GREEN’s operating cash flow stack up against its debt?
GREEN’s debt levels have fallen from kr226m to kr112m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at kr29m , ready to deploy into the business. Moreover, GREEN has produced kr17m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 15%, signalling that GREEN’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In GREEN’s case, it is able to generate 0.15x cash from its debt capital.
Can GREEN pay its short-term liabilities?
With current liabilities at kr258m, the company may not be able to easily meet these obligations given the level of current assets of kr246m, with a current ratio of 0.95x.
Can GREEN service its debt comfortably?
With a debt-to-equity ratio of 54%, GREEN 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. Though, since GREEN is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although GREEN’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 lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure GREEN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Green Landscaping Holding to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GREEN’s future growth? Take a look at our free research report of analyst consensus for GREEN’s outlook.
- Valuation: What is GREEN 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 GREEN 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 firstname.lastname@example.org.