Investors are always looking for growth in small-cap stocks like GP Strategies Corporation (NYSE:GPX), with a market cap of US$210m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health 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. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into GPX here.
Does GPX produce enough cash relative to debt?
GPX’s debt levels surged from US$59m to US$106m 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 US$10m , ready to deploy into the business. Moreover, GPX has produced cash from operations of US$8.6m during the same period of time, leading to an operating cash to total debt ratio of 8.1%, indicating that GPX’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 GPX’s case, it is able to generate 0.081x cash from its debt capital.
Can GPX pay its short-term liabilities?
Looking at GPX’s US$176m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$193m, with a current ratio of 1.1x. Usually, for Professional Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is GPX’s debt level acceptable?
With a debt-to-equity ratio of 56%, GPX can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 GPX’s case, the ratio of 6.5x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GPX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although GPX’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 GPX’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 GPX has been performing in the past. You should continue to research GP Strategies to get a better picture of the small-cap by looking at: