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Investors are always looking for growth in small-cap stocks like Globe Trade Centre S.A. (WSE:GTC), with a market cap of zł4.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into GTC here.
GTC’s Debt (And Cash Flows)
GTC's debt levels surged from €1.1b to €1.2b over the last 12 months , which includes long-term debt. With this rise in debt, GTC's cash and short-term investments stands at €94m to keep the business going. Additionally, GTC has produced €92m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 7.6%, meaning that GTC’s debt is not covered by operating cash.
Can GTC pay its short-term liabilities?
With current liabilities at €270m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.07x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is GTC’s debt level acceptable?
Since total debt levels exceed equity, GTC is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if GTC’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 GTC, the ratio of 3.04x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GTC ample headroom to grow its debt facilities.
Next Steps:
GTC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how GTC has been performing in the past. I suggest you continue to research Globe Trade Centre to get a better picture of the small-cap by looking at: