Yahoo Finance Is G8 Education Limited’s (ASX:GEM) Balance Sheet Strong Enough To Weather A Storm?
G8 Education Limited (ASX:GEM) is a small-cap stock with a market capitalization of AU$1.10B. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into GEM here.
Does GEM generate an acceptable amount of cash through operations?
GEM has shrunken its total debt levels in the last twelve months, from AU$410.65M to AU$303.49M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at AU$51.61M for investing into the business. Moreover, GEM has produced AU$92.01M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30.32%, indicating that GEM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GEM’s case, it is able to generate 0.3x cash from its debt capital.
Does GEM’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$151.06M liabilities, the company is not able to meet these obligations given the level of current assets of AU$92.19M, with a current ratio of 0.61x below the prudent level of 3x.
Is GEM’s debt level acceptable?
GEM’s level of debt is appropriate relative to its total equity, at 35.07%. This range is considered safe as GEM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if GEM’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 GEM, the ratio of 5.08x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GEM ample headroom to grow its debt facilities.
Next Steps:
GEM has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for GEM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research G8 Education to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GEM’s future growth? Take a look at our free research report of analyst consensus for GEM’s outlook.
Valuation: What is GEM 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 GEM 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 pass 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.
