Gem Diamonds Limited (LON:GEMD): Time For A Financial Health Check
Gem Diamonds Limited (LON:GEMD) is a small-cap stock with a market capitalization of UK£156m. 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? Evaluating financial health as part of your investment thesis is vital, 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GEMD here.
How does GEMD’s operating cash flow stack up against its debt?
GEMD’s debt levels surged from US$34m to US$41m over the last 12 months , which accounts for long term debt. With this rise in debt, GEMD currently has US$70m remaining in cash and short-term investments for investing into the business. Moreover, GEMD has produced cash from operations of US$161m in the last twelve months, resulting in an operating cash to total debt ratio of 389%, meaning that GEMD’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GEMD’s case, it is able to generate 3.89x cash from its debt capital.
Does GEMD’s liquid assets cover its short-term commitments?
Looking at GEMD’s US$52m in current 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 2.12x. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can GEMD service its debt comfortably?
GEMD’s level of debt is appropriate relative to its total equity, at 17%. GEMD is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether GEMD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GEMD’s, case, the ratio of 86.15x suggests that interest is comfortably 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:
GEMD’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for GEMD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Gem Diamonds to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GEMD’s future growth? Take a look at our free research report of analyst consensus for GEMD’s outlook.
Valuation: What is GEMD 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 GEMD 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.
