Destination XL Group Inc (NASDAQ:DXLG) is a small-cap stock with a market capitalization of US$135.0m. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into DXLG here.
Does DXLG produce enough cash relative to debt?
Over the past year, DXLG has reduced its debt from US$68.3m to US$61.2m , which is made up of current and long term debt. With this debt repayment, DXLG’s cash and short-term investments stands at US$6.2m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of DXLG’s operating efficiency ratios such as ROA here.
Does DXLG’s liquid assets cover its short-term commitments?
With current liabilities at US$141.3m, it seems that the business has not been able to meet these commitments with a current assets level of US$123.0m, leading to a 0.87x current account ratio. which is under the appropriate industry ratio of 3x.
Can DXLG service its debt comfortably?
With debt reaching 91.0% of equity, DXLG may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since DXLG is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
With a high level of debt on its balance sheet, DXLG could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for DXLG to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for DXLG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Destination XL Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DXLG’s future growth? Take a look at our free research report of analyst consensus for DXLG’s outlook.
- Valuation: What is DXLG 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 DXLG 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.
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.
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