Yahoo Finance What Investors Should Know About Great Canadian Gaming Corporation’s (TSE:GC) Financial Strength
While small-cap stocks, such as Great Canadian Gaming Corporation (TSE:GC) with its market cap of CA$2.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GC here.
Does GC produce enough cash relative to debt?
GC’s debt levels surged from CA$482m to CA$706m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, GC’s cash and short-term investments stands at CA$580m for investing into the business. On top of this, GC has generated CA$358m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 51%, meaning that GC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GC’s case, it is able to generate 0.51x cash from its debt capital.
Does GC’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$227m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.02x. Having said that, anything above 3x may be considered excessive by some investors. They might argue GC is leaving too much capital in low-earning investments.
Is GC’s debt level acceptable?
With a debt-to-equity ratio of 98%, GC can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In GC’s case, the ratio of 7.49x suggests that interest is appropriately 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:
Although GC’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 GC’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 GC has been performing in the past. You should continue to research Great Canadian Gaming to get a better picture of the small-cap by looking at:
Valuation: What is GC 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 GC is currently mispriced by the market.
Historical Performance: What has GC’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.
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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
