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GTN Limited (ASX:GTN) is a small-cap stock with a market capitalization of AU$489.89M. 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? Since GTN is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GTN here.
Does GTN generate enough cash through operations?
GTN’s debt level has been constant at around AU$97.57M over the previous year comprising of short- and long-term debt. At this stable level of debt, GTN’s cash and short-term investments stands at AU$100.73M , ready to deploy into the business. Moreover, GTN has generated cash from operations of AU$24.49M over the same time period, resulting in an operating cash to total debt ratio of 25.09%, signalling that GTN’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In GTN’s case, it is able to generate 0.25x cash from its debt capital.
Can GTN pay its short-term liabilities?
With current liabilities at AU$64.89M, it appears that the company has been able to meet these obligations given the level of current assets of AU$159.25M, with a current ratio of 2.45x. Usually, for Media companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is GTN’s debt level acceptable?
With debt reaching 43.27% of equity, GTN may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since GTN is currently loss-making, 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:
GTN’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. Since there is also no concerns around GTN’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how GTN has been performing in the past. I recommend you continue to research GTN to get a better picture of the small-cap by looking at: