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While small-cap stocks, such as Data Respons ASA (OB:DAT) with its market cap of øre2.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into DAT here.
DAT’s Debt (And Cash Flows)
Over the past year, DAT has ramped up its debt from øre182m to øre354m , which includes long-term debt. With this growth in debt, DAT currently has øre81m remaining in cash and short-term investments , ready to be used for running the business. Moreover, DAT has generated cash from operations of øre136m during the same period of time, leading to an operating cash to total debt ratio of 38%, meaning that DAT’s current level of operating cash is high enough to cover debt.
Does DAT’s liquid assets cover its short-term commitments?
At the current liabilities level of øre521m, it seems that the business has been able to meet these commitments with a current assets level of øre552m, leading to a 1.06x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For IT companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does DAT face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 48%, DAT can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if DAT’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 DAT, the ratio of 7.09x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although DAT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how DAT has been performing in the past. I recommend you continue to research Data Respons to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DAT’s future growth? Take a look at our free research report of analyst consensus for DAT’s outlook.
- Valuation: What is DAT 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 DAT 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.