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While small-cap stocks, such as GFT Technologies SE (ETR:GFT) with its market cap of €194m, 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into GFT here.
GFT’s Debt (And Cash Flows)
GFT's debt level has been constant at around €112m over the previous year – this includes long-term debt. At this current level of debt, GFT's cash and short-term investments stands at €63m , ready to be used for running the business. Additionally, GFT has generated €47m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 42%, indicating that GFT’s current level of operating cash is high enough to cover debt.
Can GFT meet its short-term obligations with the cash in hand?
With current liabilities at €110m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.63x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can GFT service its debt comfortably?
GFT is a relatively highly levered company with a debt-to-equity of 86%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if GFT’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 GFT, the ratio of 11.21x 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.
GFT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around GFT's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure GFT has company-specific issues impacting its capital structure decisions. You should continue to research GFT Technologies to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GFT’s future growth? Take a look at our free research report of analyst consensus for GFT’s outlook.
- Valuation: What is GFT 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 GFT 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.