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While small-cap stocks, such as Green Plains Inc. (NASDAQ:GPRE) with its market cap of US$516m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since GPRE is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into GPRE here.
GPRE’s Debt (And Cash Flows)
GPRE has shrunk its total debt levels in the last twelve months, from US$1.4b to US$943m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$214m to keep the business going. Additionally, GPRE has generated US$59m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 6.3%, meaning that GPRE’s debt is not covered by operating cash.
Does GPRE’s liquid assets cover its short-term commitments?
Looking at GPRE’s US$766m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is GPRE’s debt level acceptable?
GPRE is a relatively highly levered company with a debt-to-equity of 86%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since GPRE is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although GPRE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around GPRE's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure GPRE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Green Plains to get a better picture of the small-cap by looking at: