Yahoo Finance What Investors Should Know About Gamehost Inc.'s (TSE:GH) Financial Strength
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Gamehost Inc. (TSE:GH) is a small-cap stock with a market capitalization of CA$237m. 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? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into GH here.
GH’s Debt (And Cash Flows)
GH's debt levels surged from CA$26m to CA$41m over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$16m , ready to be used for running the business. On top of this, GH has produced cash from operations of CA$22m during the same period of time, leading to an operating cash to total debt ratio of 53%, meaning that GH’s current level of operating cash is high enough to cover debt.
Can GH meet its short-term obligations with the cash in hand?
With current liabilities at CA$31m, it seems that the business may not have an easy time meeting these commitments with a current assets level of CA$19m, leading to a current ratio of 0.63x. The current ratio is the number you get when you divide current assets by current liabilities.
Can GH service its debt comfortably?
GH’s level of debt is appropriate relative to its total equity, at 34%. GH is not taking on too much debt commitment, which may be constraining for future growth. We can test if GH’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 GH, the ratio of 23.27x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
GH’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how GH has been performing in the past. I recommend you continue to research Gamehost to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GH’s future growth? Take a look at our free research report of analyst consensus for GH’s outlook.
Valuation: What is GH 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 GH is currently mispriced by the market.
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.
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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.
