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GrainCorp Limited (ASX:GNC): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like GrainCorp Limited (ASX:GNC), with a market cap of AU$1.90b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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 recommend you dig deeper yourself into GNC here.

How does GNC’s operating cash flow stack up against its debt?

GNC’s debt levels have fallen from AU$1.19b to AU$1.09b over the last 12 months , which is made up of current and long term debt. With this reduction in debt, GNC currently has AU$388.90m remaining in cash and short-term investments , ready to deploy into the business. On top of this, GNC has produced cash from operations of AU$300.50m in the last twelve months, leading to an operating cash to total debt ratio of 27.57%, meaning that GNC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GNC’s case, it is able to generate 0.28x cash from its debt capital.

Can GNC meet its short-term obligations with the cash in hand?

Looking at GNC’s most recent AU$810.20m liabilities, the company has been able to meet these commitments with a current assets level of AU$1.52b, leading to a 1.87x current account ratio. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

ASX:GNC Historical Debt June 21st 18
ASX:GNC Historical Debt June 21st 18

Can GNC service its debt comfortably?

With a debt-to-equity ratio of 88.49%, GNC can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if GNC’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 GNC, the ratio of 1.94x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as GNC’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although GNC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for GNC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research GrainCorp to get a better picture of the small-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for GNC’s future growth? Take a look at our free research report of analyst consensus for GNC’s outlook.

  2. Valuation: What is GNC 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 GNC is currently mispriced by the market.

  3. 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.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.