While small-cap stocks, such as G-III Apparel Group, Ltd. (NASDAQ:GIII) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into GIII here.
How much cash does GIII generate through its operations?
GIII’s debt level has been constant at around US$694m over the previous year which accounts for long term debt. At this constant level of debt, GIII currently has US$66m remaining in cash and short-term investments for investing into the business. Moreover, GIII has generated US$89m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13%, indicating that GIII’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GIII’s case, it is able to generate 0.13x cash from its debt capital.
Can GIII pay its short-term liabilities?
At the current liabilities level of US$623m, it appears that the company has been able to meet these commitments with a current assets level of US$1.6b, leading to a 2.54x 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.
Is GIII’s debt level acceptable?
With a debt-to-equity ratio of 59%, GIII 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. 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 after interest and tax at least three times its net interest payments is considered financially sound. In GIII’s case, the ratio of 4.88x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GIII ample headroom to grow its debt facilities.
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. I admit this is a fairly basic analysis for GIII’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research G-III Apparel Group to get a more holistic view 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.
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