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Is Dalata Hotel Group plc’s (ISE:DHG) Balance Sheet A Threat To Its Future?

Kayla Ward

Investors are always looking for growth in small-cap stocks like Dalata Hotel Group plc (ISE:DHG), with a market cap of €1.26b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into DHG here.

How much cash does DHG generate through its operations?

DHG has shrunken its total debt levels in the last twelve months, from €283.8m to €261.9m – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €15.7m , ready to deploy into the business. On top of this, DHG has generated cash from operations of €95.2m during the same period of time, leading to an operating cash to total debt ratio of 36.4%, indicating that DHG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DHG’s case, it is able to generate 0.36x cash from its debt capital.

Can DHG meet its short-term obligations with the cash in hand?

At the current liabilities level of €83.4m liabilities, it appears that the company is not able to meet these obligations given the level of current assets of €38.2m, with a current ratio of 0.46x below the prudent level of 3x.

ISE:DHG Historical Debt August 31st 18

Can DHG service its debt comfortably?

With debt at 35.5% of equity, DHG may be thought of as appropriately levered. This range is considered safe as DHG is not taking on too much debt obligation, which may be constraining for future growth. We can test if DHG’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 DHG, the ratio of 12.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving DHG ample headroom to grow its debt facilities.

Next Steps:

DHG’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure DHG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Dalata Hotel Group to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DHG’s future growth? Take a look at our free research report of analyst consensus for DHG’s outlook.
  2. Valuation: What is DHG 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 DHG is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.