DGSE Cos., Inc. :DGSE-US: Earnings Analysis: 2016 By the Numbers : April 18, 2017

DGSE Cos., Inc. reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of DGSE Cos., Inc. – Tiffany & Co. and Signet Jewelers Limited (TIF-US and SIG-US) that have also reported for this period.

Highlights

  • Gross margins widened from 15.09% to 16.36% compared to the same period last year, operating (EBITDA) margins now -4.22% from -2.34%.
  • Year-on-year change in operating cash flow of 185.05% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 48.33 60.92 70.74 108.54 127.88
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings -4.01 -2.33 -0.63 -2.66 -1.62
Earnings Growth (YOY) -71.9 -267.17 76.13 -63.98 -260
Net Margin -8.29 -3.83 -0.9 -2.45 -1.27
EPS -0.3 -0.18 -0.37 -0.22 -0.19
Return on Equity -81.94 -46.8 -7.69 -22.62 -11.43
Return on Assets -27.56 -13.29 -2.9 -10.42 -6.03

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Earnings Growth Analysis

The company’s earnings declined year-on-year largely because of the increases in operating costs. Its operating margins (EBITDA margins) went from -2.34% to -4.22%. This decline in earnings would have been worse except for the fact that the company showed improvement in gross margins, from 15.09% to 16.36%. For comparison, gross margins were 15.09% and EBITDA margins -2.34% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

DGSE-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 21.98, compared to last year’s level of 21.49 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

DGSE-US‘s change in operating cash flow of 185.05% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from -3.22% to -5.05% and (2) one-time items that contributed to a decrease in pretax margins from -3.77% to -8.19%

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

DGSE Cos., Inc. engages in the jewelry business. Its activities include buying and selling all kinds of jewelries including diamonds, fine watches, rare coins and currency, precious metal bullion products, scrap gold, silver, platinum, and palladium as well as collectibles and other valuables. It offers its products through retail and wholesale store. The company was founded on September 16, 1965 and is headquartered in Dallas, TX.

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