While small-cap stocks, such as Dignity plc (LON:DTY) with its market cap of UK£526.59m, 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 essential, as mismanagement of capital can lead to 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into DTY here.
How does DTY’s operating cash flow stack up against its debt?
DTY has sustained its debt level by about UK£565.70m over the last 12 months – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at UK£49.30m , ready to deploy into the business. On top of this, DTY has generated cash from operations of UK£75.00m in the last twelve months, leading to an operating cash to total debt ratio of 13.26%, indicating that DTY’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DTY’s case, it is able to generate 0.13x cash from its debt capital.
Does DTY’s liquid assets cover its short-term commitments?
With current liabilities at UK£70.00m, it seems that the business has been able to meet these commitments with a current assets level of UK£94.90m, leading to a 1.36x current account ratio. For Consumer Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does DTY face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, DTY is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether DTY 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 DTY’s, case, the ratio of 3.91x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DTY’s high interest coverage is seen as responsible and safe practice.
DTY’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for DTY’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Dignity to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DTY’s future growth? Take a look at our free research report of analyst consensus for DTY’s outlook.
- Valuation: What is DTY 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 DTY 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 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.