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What does G-III Apparel Group, Ltd.’s (NASDAQ:GIII) Balance Sheet Tell Us About Its Future?

Matthew Smith

Investors are always looking for growth in small-cap stocks like G-III Apparel Group, Ltd. (NASDAQ:GIII), with a market cap of US$1.4b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into GIII here.

How much cash does GIII generate through its operations?

Over the past year, GIII has maintained its debt levels at around US$694m – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$66m for investing into the business. On top of this, 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 debt is not appropriately covered by operating cash. 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 0.13x cash from its debt capital.

Does GIII’s liquid assets cover its short-term commitments?

At the current liabilities level of US$623m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 2.54x. Usually, for Luxury companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:GIII Historical Debt January 11th 19

Can GIII service its debt comfortably?

With debt reaching 59% of equity, GIII may be thought of as relatively highly levered. 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 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.

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:

  1. 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.
  2. 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.
  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.