While small-cap stocks, such as Green Brick Partners Inc (NASDAQ:GRBK) with its market cap of US$461m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into GRBK here.
How much cash does GRBK generate through its operations?
GRBK has built up its total debt levels in the last twelve months, from US$105m to US$200m , which is made up of current and long term debt. With this rise in debt, GRBK currently has US$33m remaining in cash and short-term investments for investing 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 GRBK’s operating efficiency ratios such as ROA here.
Can GRBK meet its short-term obligations with the cash in hand?
Looking at GRBK’s most recent US$94m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$715m, with a current ratio of 7.65x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue GRBK could be holding too much capital in a low-return investment environment.
Can GRBK service its debt comfortably?
With debt reaching 42% of equity, GRBK 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.
GRBK’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how GRBK has been performing in the past. I suggest you continue to research Green Brick Partners to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GRBK’s future growth? Take a look at our free research report of analyst consensus for GRBK’s outlook.
- Valuation: What is GRBK 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 GRBK 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.