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While small-cap stocks, such as China Distance Education Holdings Limited (NYSE:DL) with its market cap of US$240m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into DL here.
How much cash does DL generate through its operations?
Over the past year, DL has ramped up its debt from US$52m to US$63m , which accounts for long term debt. With this rise in debt, DL currently has US$48m remaining in cash and short-term investments for investing into the business. On top of this, DL has produced US$50m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 80%, meaning that DL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DL’s case, it is able to generate 0.8x cash from its debt capital.
Does DL’s liquid assets cover its short-term commitments?
Looking at DL’s US$194m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.66x.
Is DL’s debt level acceptable?
With a debt-to-equity ratio of 57%, DL can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In DL’s case, the ratio of 19.61x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving DL ample headroom to grow its debt facilities.
DL’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for DL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Distance Education Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DL’s future growth? Take a look at our free research report of analyst consensus for DL’s outlook.
- Valuation: What is DL 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 DL 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 email@example.com.