While small-cap stocks, such as ZK International Group Co., Ltd. (NASDAQ:ZKIN) with its market cap of US$24m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, these checks don’t give you a full picture, so I recommend you dig deeper yourself into ZKIN here.
ZKIN’s Debt (And Cash Flows)
ZKIN has shrunk its total debt levels in the last twelve months, from US$29m to US$23m made up of predominantly near term debt. With this debt payback, ZKIN currently has US$8.5m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of ZKIN’s operating efficiency ratios such as ROA here.
Does ZKIN’s liquid assets cover its short-term commitments?
With current liabilities at US$39m, it appears that the company has been able to meet these obligations given the level of current assets of US$64m, with a current ratio of 1.64x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ZKIN’s debt level acceptable?
ZKIN is a relatively highly levered company with a debt-to-equity of 62%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether ZKIN 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 ZKIN’s, case, the ratio of 7.83x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ZKIN ample headroom to grow its debt facilities.
ZKIN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ZKIN’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ZKIN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ZK International Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZKIN’s future growth? Take a look at our free research report of analyst consensus for ZKIN’s outlook.
- Historical Performance: What has ZKIN’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.
- 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.
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