Advertisement
UK markets closed
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • CRUDE OIL

    83.05
    +1.70 (+2.09%)
     
  • GOLD FUTURES

    2,244.90
    +32.20 (+1.46%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • Bitcoin GBP

    56,017.71
    +1,449.53 (+2.66%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • NASDAQ Composite

    16,379.46
    -20.06 (-0.12%)
     
  • UK FTSE All Share

    4,338.05
    +12.12 (+0.28%)
     

Are Games Workshop Group PLC’s (LON:GAW) Interest Costs Too High?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Games Workshop Group PLC (LON:GAW), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean GAW has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

Check out our latest analysis for Games Workshop Group

Is financial flexibility worth the lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. Either GAW does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A double-digit revenue growth of 39% is considered relatively high for a small-cap company like GAW. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.

LSE:GAW Historical Debt December 13th 18
LSE:GAW Historical Debt December 13th 18

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

Given zero long-term debt on its balance sheet, Games Workshop Group has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of UK£31m, it appears that the company has been able to meet these obligations given the level of current assets of UK£63m, with a current ratio of 2.05x. Generally, for Leisure companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Next Steps:

Having no debt on the books means GAW has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, GAW’s financial situation may change. I admit this is a fairly basic analysis for GAW’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Games Workshop Group to get a better picture of the stock by looking at:

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

  2. Valuation: What is GAW 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 GAW 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.