Is Gem Diamonds Limited (LSE:GEMD) A Financially Sound Company?
Gem Diamonds Limited (LSE:GEMD) is a small-cap stock with a market capitalization of GBP £111.20M. 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? Since GEMD is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into GEMD here.
How does GEMD’s operating cash flow stack up against its debt?
GEMD’s debt levels have fallen from $30.4M to $27.8M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, GEMD’s cash and short-term investments stands at $27.9M for investing into the business. Moreover, GEMD has produced cash from operations of $70.7M over the same time period, resulting in an operating cash to total debt ratio of 2.55x, signalling that GEMD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In GEMD’s case, it is able to generate 2.55x cash from its debt capital.
Can GEMD meet its short-term obligations with the cash in hand?
At the current liabilities level of $57.2M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.27x. For metals and mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can GEMD service its debt comfortably?
With a debt-to-equity ratio of 16.14%, GEMD’s debt level may be seen as prudent. GEMD is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with GEMD, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? GEMD’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may change. You should always be researching market expectations for GEMD’s future growth on our free analysis platform.
Are you a potential investor? Although GEMD’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to also examine the company’s track record. You should continue your analysis by taking a look at GEMD’s past performance analysis on our free platform to figure out GEMD’s financial health position.
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.
