|Forum - Mining and Commodities Eh!
||All things commodities, with a Canadian Junior Miner focus.|
|From: madrid (Rep: 0) reply to madrid||Date: 08/31/2017 09:00|
|Forum: Mining and Commodities Eh! - Msg #5957||Thread #673935237 (Rec: 0) |
|Re: Galaxy Resources. Strong Financial Results. |
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Is Galaxy Resources Limited’s (ASX:GXY) Balance Sheet Strong Enough To Weather A Storm?
Scott Perkins August 31, 2017
Investors are always looking for growth in small-cap stocks like Galaxy Resources Limited (ASX:GXY), with a market cap of $700.24M. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge.
Check out our latest analysis for Galaxy Resources
How does GXY’s operating cash flow stack up against its debt?
ASX:GXY Historical Debt Aug 31st 17 Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations.These catastrophes does not mean the company can stop servicing its debt obligations.Can GXY pay off what it owes to its debtholder by using only cash from its operational activities? In the case of GXY, operating cash flow turned out to be 0.54x its debt level over the past twelve months. A ratio of over 0.5x is a positive sign and shows that GXY is generating more than enough cash from its core business, which should increase its potential to pay back near-term debt.
Can GXY pay its short-term liabilities?
ASX:GXY Net Worth Aug 31st 17 In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, GXY may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that GXY does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is GXY’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. GXY’s debt-to-equity ratio stands at 2.37%, which indicates that the company faces low risk associated with debt. 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 at least three times its interest payments is considered financially sound. GXY’s profits only covers interest 0.24 times, which is deemed as inadequate. Debtors may be less inclined to loan the company more money, giving GXY less headroom for growth through debt.
Although GXY’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on Galaxy Resources to see what other factors for GXY you should consider.
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