The company is in excellent financial condition. They carry a very small amount of long term debt. During a recent visit we asked the CFO about the debt and why it had not been refinanced, he stated that they probably should just pay it off but it is relatively insignificant and they have no problems in securing lines for short term financing however the business is financed by cash flow from operations. They aim to turn over their inventory at least 5-6 times in 2006.
The small company is basically a two-man management show with the CFO running the everyday operations of the company and the CEO running the sales of the company, including the hiring of sales reps and maning the booth at the two large trade show which they attend. They have a third key member of the staff who speaks Chinese and visits China to shop production of their overseas manufactoring. I believe that the company currently uses eleven sales reps and pays them on a commission-only basis.
As far as FCF I like to evaluate the earnings yield of company by dividing operating income(ebit) by the enterprise value of the business. This is the method recommended in "The Little Book That Beats the Market". By using operating income it eliminates differences in tax rates and interest expense. The company debt is then taken into consideration in the enterprise value. Using this formula the company is dirt cheap yielding over 15% or under 7x EBIT to Enterprise Value. Furthermore the company payed full taxes of 40% in 2005 as opposed to 28% in 2004, therefore their comparisions in 2006 using a P/E ratio will be fair. On top of that they had an inventory glitch in the fourth quarter of 2005 that caused a stocking problem of Gun Master kits @ Walmart, resulting in a slight earnings miss. This year the comparisions will be very favorable during their peak 4th quarter. Also you should note that they did over a million in sales in January for the first time, demonstrating that the shortfall was probably a one time glitch.
All they need for the company to skyrocket in terms of revenues and earnings, are a few new products with Walmart shelf space. DAC has a very good relationship with with Walmart and should be able to increase shelf space as they continue to develop quality products at inexpensive prices. I must reinterate their Gun Master product line is the "Mercedes of gun cleaning products", look for yourself. I hope that the company continues to develop the brand and I talked to the CFO about this. Note that they stated they are adding more gun cleaning lines in 2006 and the NRA is now on board.