While small-cap stocks, such as Groupon, Inc. (NASDAQ:GRPN) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Online Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into GRPN here.
How much cash does GRPN generate through its operations?
GRPN has sustained its debt level by about US$232m over the last 12 months which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$572m , ready to deploy into the business. Moreover, GRPN has produced cash from operations of US$140m during the same period of time, leading to an operating cash to total debt ratio of 60%, indicating that GRPN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In GRPN’s case, it is able to generate 0.6x cash from its debt capital.
Does GRPN’s liquid assets cover its short-term commitments?
Looking at GRPN’s US$771m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$752m, with a current ratio of 0.98x.
Is GRPN’s debt level acceptable?
With a debt-to-equity ratio of 70%, GRPN can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since GRPN is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although GRPN’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for GRPN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Groupon to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GRPN’s future growth? Take a look at our free research report of analyst consensus for GRPN’s outlook.
- Valuation: What is GRPN 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 GRPN 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 email@example.com.