Dateline Resources Limited (ASX:DTR) is a small-cap stock with a market capitalization of AU$24m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Since DTR is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into DTR here.
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DTR’s Debt (And Cash Flows)
DTR's debt levels surged from AU$539k to AU$8.2m over the last 12 months , which is mainly comprised of near term debt. With this increase in debt, DTR's cash and short-term investments stands at AU$103k , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of DTR’s operating efficiency ratios such as ROA here.
Does DTR’s liquid assets cover its short-term commitments?
Looking at DTR’s AU$8.9m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of AU$141k, with a current ratio of 0.016x. The current ratio is the number you get when you divide current assets by current liabilities.
Can DTR service its debt comfortably?
Since total debt levels exceed equity, DTR is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since DTR is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
DTR’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for DTR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Dateline Resources to get a more holistic view of the stock by looking at:
- Historical Performance: What has DTR's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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