Gazal Corporation Limited (ASX:GZL) is a small-cap stock with a market capitalization of A$110.87M. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into GZL here.
Does GZL generate enough cash through operations?
GZL’s debt levels surged from A$1.0M to A$25.5M over the last 12 months , which is made up of current and long term debt. With this growth in debt, GZL’s cash and short-term investments stands at A$2.6M , ready to deploy into the business. Though, GZL is only producing cash from operations of A$0.0M during the same period of time, resulting in an operating cash to total debt ratio of less than 1x, indicating that its 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 GZL’s case, it produces less than 1x cash from its debt capital.
Does GZL’s liquid assets cover its short-term commitments?
With current liabilities at A$20.9M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$35.3M, with a current ratio of 1.69x. Usually, for luxury companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can GZL service its debt comfortably?
With debt at 23.77% of equity, GZL may be thought of as appropriately levered. GZL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether GZL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In GZL’s, case, the ratio of 9.5x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GZL ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? Although GZL’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. I recommend keeping on top of market expectations for GZL’s future growth on our free analysis platform.