What's not to like - an outsider's perspective. I do not own this business, nor do I wish to.
Balance sheet
- Extremely high intangible assets compared to equity - They only have $15 mil of tangible assets against total liabilities of $29 mil - High debt:equity - depending on how you work it out it's above 70% - Interest cover is only just above 2 times
Ratio Analysis - ROE is ($3,456 / $30,292) = 11.4% which is ok, but poor when you consider the leverage they are employing - ROIC is ($3,456/ ($30,292 + $20,232 + $385)) = 6.8%
Given their financial position, they appear to be at a stage where they have heavily leveraged their balance sheet to pursue expansion to get to where they are. I don't believe banks will be willing to lend more money for acquisitions, so I see more capital raisings to fund expansion - if banks are willing to lend, I believe it would be at a prohibitively high interest cost.
Free cash-flow is NOT paying for the expansion + dividends. In 2011 the operating business generated $6,143,000 ($1,024 of this was due to expansion of trade payables so not truly operating cash flow - perhaps their cash-flow looks good as they are dragging their suppliers, which they may be able to do for a few more years, something to watch).
So, generating $6.15 million, they then paid $8.85 million for acquisitions. A shortfall of $2.7 million. This shortfall was covered by taking out an additional $2.89 million in debt. The business is not self-funding the expansion, the bank is.
They then issued $3.35 million worth of new shares, whilst paying dividends of $1.78 million - that is robbing Peter to pay Paul. That means they asked you to contribute after-tax dollars to them (through new share issue), whilst then paying out dividends which are re-taxed in your hands. Terrible capital management.
In 2010, they also issued new shares of $651,000 to cover the dividends of $466,000.
This was what I picked up from a quick peruse of their 2011 report, I would be very careful with this company. It reminds me of the expansion & consoldiation strategy used by ABC learning, it is not sustainable - and unless profitability dramatically improves, it is not providing an economic return on the capital employed - a recipe for disaster.
GXL Price at posting:
$1.47 Sentiment: None Disclosure: Not Held
