Investors are always looking for growth in small-cap stocks like Kingold Jewelry Inc (NASDAQ:KGJI), with a market cap of US$91.90M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, 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. However, since I only look at basic financial figures, I recommend you dig deeper yourself into KGJI here.
How does KGJI’s operating cash flow stack up against its debt?
KGJI has built up its total debt levels in the last twelve months, from US$1.95B to US$2.63B , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$5.00M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 KGJI’s operating efficiency ratios such as ROA here.
Can KGJI meet its short-term obligations with the cash in hand?
At the current liabilities level of US$1.29B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.59x. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is KGJI’s debt level acceptable?
KGJI is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if KGJI’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 KGJI, the ratio of 1.49x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as KGJI’s low interest coverage already puts the company at higher risk of default.
KGJI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for KGJI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Kingold Jewelry to get a better picture of the stock by looking at:
- Valuation: What is KGJI 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 KGJI is currently mispriced by the market.
- Historical Performance: What has KGJI’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.
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.