While small-cap stocks, such as Destination XL Group, Inc. (NASDAQ:DXLG) with its market cap of US$108m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since DXLG is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into DXLG here.
DXLG’s Debt (And Cash Flows)
DXLG's debt level has been constant at around US$57m over the previous year – this includes long-term debt. At this current level of debt, DXLG currently has US$4.9m remaining in cash and short-term investments , ready to be used for running the business. On top of this, DXLG has generated cash from operations of US$16m over the same time period, resulting in an operating cash to total debt ratio of 28%, meaning that DXLG’s current level of operating cash is high enough to cover debt.
Can DXLG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$108m, it seems that the business has been able to meet these obligations given the level of current assets of US$128m, with a current ratio of 1.18x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Specialty Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DXLG service its debt comfortably?
With debt reaching 97% of equity, DXLG may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since DXLG is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although DXLG’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 DXLG's liquidity needs, this may be its optimal capital structure for the time being. 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 small-cap by looking at:
- Historical Performance: What has DXLG'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.
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.