Yahoo Finance Is Genesis Energy Limited’s (NZSE:GNE) Balance Sheet A Threat To Its Future?
Genesis Energy Limited (NZSE:GNE) is a small-cap stock with a market capitalization of NZ$2.6b. 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? Evaluating financial health as part of your investment thesis is crucial, 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. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into GNE here.
Does GNE produce enough cash relative to debt?
GNE has sustained its debt level by about NZ$1.3b over the last 12 months – this includes both the current and long-term debt. At this current level of debt, GNE’s cash and short-term investments stands at NZ$49m , ready to deploy into the business. Additionally, GNE has generated NZ$331m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 26%, meaning that GNE’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 GNE’s case, it is able to generate 0.26x cash from its debt capital.
Can GNE pay its short-term liabilities?
Looking at GNE’s most recent NZ$463m liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.85x.
Can GNE service its debt comfortably?
With a debt-to-equity ratio of 64%, GNE 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. We can check to see whether GNE 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 GNE’s, case, the ratio of 2.28x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Although GNE’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 GNE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Genesis Energy to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GNE’s future growth? Take a look at our free research report of analyst consensus for GNE’s outlook.
Valuation: What is GNE 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 GNE 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 editorial-team@simplywallst.com.
