Ever-Glory International Group Inc (NASDAQ:EVK) is a small-cap stock with a market capitalization of $35.58M. 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 essential, 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. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into EVK here.
How does EVK’s operating cash flow stack up against its debt?
Over the past year, EVK has reduced its debt from $44.8M to $29.2M , which is mainly comprised of near term debt. With this reduction in debt, EVK’s cash and short-term investments stands at $45.3M , ready to deploy into the business. Additionally, EVK has produced $44.1M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 150.95%, meaning that EVK’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 EVK’s case, it is able to generate 1.51x cash from its debt capital.
Can EVK meet its short-term obligations with the cash in hand?
Looking at EVK’s most recent $113.7M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.52x. For Luxury companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is EVK’s debt level acceptable?
With debt reaching 47.77% of equity, EVK 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 EVK’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 EVK, the ratio of 20.65x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as EVK’s high interest coverage is seen as responsible and safe practice.
Although EVK’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 EVK’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 EVK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ever-Glory International Group to get a better picture of the stock by looking at:
1. Valuation: What is EVK 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 EVK is currently mispriced by the market.
2. Historical Performance: What has EVK’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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 pass 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.