ZK International Group Co Ltd (NASDAQ:ZKIN) is a small-cap stock with a market capitalization of $115.96M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ZKIN here.
How does ZKIN’s operating cash flow stack up against its debt?
ZKIN’s debt level has been constant at around $27.4M over the previous year made up of predominantly near term debt. At this constant level of debt, ZKIN’s cash and short-term investments stands at $0.1M for investing into the business. However, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of ZKIN’s operating efficiency ratios such as ROA here.
Can ZKIN meet its short-term obligations with the cash in hand?
Looking at ZKIN’s most recent $36.0M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $38.9M, leading to a 1.08x current account ratio. Generally, for metals and mining companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ZKIN face the risk of succumbing to its debt-load?With total debt exceeding equities, ZKIN is considered a highly levered company. 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 ZKIN’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 ZKIN, the ratio of 5.57x 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.
Are you a shareholder? At its current level of cash flow coverage, ZKIN has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. I recommend keeping on top of market expectations for ZKIN’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, ZKIN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for ZKIN to increase its operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I encourage you to continue your research by taking a look at ZKIN’s past performance analysis on our free platform to figure out ZKIN’s financial health position.