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Are Derichebourg’s (EPA:DBG) Interest Costs Too High?

Jenifer Prater

Derichebourg (EPA:DBG) is a small-cap stock with a market capitalization of €639m. 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? So, 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. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into DBG here.

Does DBG produce enough cash relative to debt?

Over the past year, DBG has reduced its debt from €259m to €242m – this includes long-term debt. With this reduction in debt, DBG currently has €146m remaining in cash and short-term investments , ready to deploy into the business. Additionally, DBG has produced €170m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 70%, signalling that DBG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DBG’s case, it is able to generate 0.7x cash from its debt capital.

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

With current liabilities at €658m, the company has been able to meet these obligations given the level of current assets of €658m, with a current ratio of 1x. For Commercial Services 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.

ENXTPA:DBG Historical Debt January 20th 19
ENXTPA:DBG Historical Debt January 20th 19

Can DBG service its debt comfortably?

DBG is a relatively highly levered company with a debt-to-equity of 47%. 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 DBG 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 DBG’s, case, the ratio of 10.29x suggests that interest is comfortably 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.

Next Steps:

DBG’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. Since there is also no concerns around DBG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure DBG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Derichebourg to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DBG’s future growth? Take a look at our free research report of analyst consensus for DBG’s outlook.

  2. Valuation: What is DBG 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 DBG 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.