Investors are always looking for growth in small-cap stocks like G-III Apparel Group Ltd (NASDAQ:GIII), with a market cap of US$1.9b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GIII here.
How does GIII’s operating cash flow stack up against its debt?
GIII’s debt levels have fallen from US$569m to US$494m over the last 12 months , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$42m , ready to deploy into the business. Additionally, GIII has generated US$109m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22%, indicating that GIII’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GIII’s case, it is able to generate 0.22x cash from its debt capital.
Can GIII meet its short-term obligations with the cash in hand?
At the current liabilities level of US$601m, the company has been able to meet these commitments with a current assets level of US$1.3b, leading to a 2.12x current account ratio. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does GIII face the risk of succumbing to its debt-load?
GIII is a relatively highly levered company with a debt-to-equity of 45%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if GIII’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 GIII, the ratio of 5.01x suggests that interest is appropriately 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.
Next Steps:
Although GIII’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. Since there is also no concerns around GIII’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 GIII has company-specific issues impacting its capital structure decisions. I recommend you continue to research G-III Apparel Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GIII’s future growth? Take a look at our free research report of analyst consensus for GIII’s outlook.
- Valuation: What is GIII 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 GIII 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.
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.