GP Strategies Corporation (NYSE:GPX) is a small-cap stock with a market capitalization of US$219m. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into GPX here.
How does GPX’s operating cash flow stack up against its debt?
Over the past year, GPX has ramped up its debt from US$59m to US$106m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$10m for investing into the business. On top of this, GPX has generated US$8.6m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 8.1%, meaning that GPX’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GPX’s case, it is able to generate 0.081x cash from its debt capital.
Does GPX’s liquid assets cover its short-term commitments?
With current liabilities at US$176m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. Usually, for Professional Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does GPX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 56%, GPX 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 check to see whether GPX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GPX’s, case, the ratio of 6.5x 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.
Although GPX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around GPX’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for GPX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research GP Strategies to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GPX’s future growth? Take a look at our free research report of analyst consensus for GPX’s outlook.
- Valuation: What is GPX 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 GPX 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.