Golden Queen Mining Co Ltd (TSX:GQM) is a small-cap stock with a market capitalization of CAD CA$23.34M. 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? Given that GQM is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into GQM here.
Does GQM generate an acceptable amount of cash through operations?
GQM has shrunken its total debt levels in the last twelve months, from $54M to $41M – this includes both the current and long-term debt. With this reduction in debt, GQM’s cash and short-term investments stands at $13M for investing into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of GQM’s operating efficiency ratios such as ROA here.
Can GQM meet its short-term obligations with the cash in hand?
With current liabilities at $17M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.49x. For metals and mining companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is GQM’s level of debt at an acceptable level?
With debt reaching 51.60% of equity, GQM 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. Though, since GQM is presently unprofitable, 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.
Next Steps:
Are you a shareholder? GQM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that GQM’s financial situation may change. I recommend keeping abreast of market expectations for GQM’s future growth on our free analysis platform.