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Are Destination Maternity Corporation’s (DEST) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like Destination Maternity Corporation (NASDAQ:DEST), with a market cap of USD $38.11M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the specialty retail industry facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend dig deeper yourself into DEST here.

Does DEST generate an acceptable amount of cash through operations?

DEST has built up its total debt levels in the last twelve months, from $41M to $43M – this includes both the current and long-term debt. With this rise in debt, DEST currently has $3M remaining in cash and short-term investments for investing into the business. Moreover, DEST has produced $11M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.25x, meaning that DEST’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In DEST’s case, it is able to generate 0.25x cash from its debt capital.

NasdaqGS:DEST Historical Debt Nov 22nd 17
NasdaqGS:DEST Historical Debt Nov 22nd 17

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

Looking at DEST’s most recent $61M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.49x. Generally, for specialty retail companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does DEST face the risk of succumbing to its debt-load?

DEST is a relatively highly levered company with a debt-to-equity of 67.69%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since DEST is currently loss-making, 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.

Next Steps:

Are you a shareholder? Although DEST’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. Since there is also no concerns around DEST’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. I recommend researching market expectations for DEST’s future growth on our free analysis platform.

Are you a potential investor? DEST’s high debt level shouldn’t scare off investors just yet. Its operating cash flow seems adequate to meet obligations which means its debt is being put to good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. To gain more confidence in the stock, you need to also analyse DEST’s track record. I encourage you to continue your research by taking a look at DEST’s past performance analysis on our free platform to figure out DEST’s financial health position.


To help readers see pass 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.

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