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Galliford Try plc (LSE:GFRD) is a small-cap stock with a market capitalization of UK£992.60M. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into GFRD here.
Does GFRD generate an acceptable amount of cash through operations?
Over the past year, GFRD has ramped up its debt from UK£613.00M to UK£760.60M , which comprises of short- and long-term debt. With this growth in debt, GFRD’s cash and short-term investments stands at UK£765.80M , ready to deploy into the business. Additionally, GFRD has generated cash from operations of UK£106.30M during the same period of time, leading to an operating cash to total debt ratio of 13.98%, indicating that GFRD’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GFRD’s case, it is able to generate 0.14x cash from its debt capital.
Can GFRD pay its short-term liabilities?
Looking at GFRD’s most recent UK£1.79B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of UK£2.30B, with a current ratio of 1.28x. Usually, for Construction 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.
Does GFRD face the risk of succumbing to its debt-load?
GFRD is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether GFRD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GFRD’s, case, the ratio of 12.51x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving GFRD ample headroom to grow its debt facilities.