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Is Games Workshop Group PLC's (LON:GAW) Liquidity Good Enough?

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Games Workshop Group PLC (LON:GAW), with a market cap of UK£1.6b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. GAW’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GAW here.

View our latest analysis for Games Workshop Group

Is GAW’s debt level acceptable?

Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. The good news for investors is that Games Workshop Group has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with GAW, and the company has plenty of headroom and ability to raise debt should it need to in the future.

LSE:GAW Historical Debt, June 26th 2019
LSE:GAW Historical Debt, June 26th 2019

Does GAW’s liquid assets cover its short-term commitments?

Since Games Workshop Group doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at GAW’s UK£25m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£70m, leading to a 2.8x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Leisure 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.

Next Steps:

GAW has no debt in addition to ample cash to cover its short-term commitments. Its safe operations reduces risk for the company and shareholders, however, some degree of debt may also boost earnings growth and operational efficiency. I admit this is a fairly basic analysis for GAW's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Games Workshop Group to get a more holistic view of the stock by looking at:

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  1. Valuation: What is GAW 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 GAW is currently mispriced by the market.

  2. Historical Performance: What has GAW's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.