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Investors are always looking for growth in small-cap stocks like discoverIE Group plc (LON:DSCV), with a market cap of UK£304m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into DSCV here.
How much cash does DSCV generate through its operations?
DSCV has built up its total debt levels in the last twelve months, from UK£54m to UK£80m , which accounts for long term debt. With this increase in debt, DSCV currently has UK£18m remaining in cash and short-term investments for investing into the business. On top of this, DSCV has produced cash from operations of UK£14m in the last twelve months, resulting in an operating cash to total debt ratio of 17%, signalling that DSCV’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DSCV’s case, it is able to generate 0.17x cash from its debt capital.
Can DSCV pay its short-term liabilities?
With current liabilities at UK£89m, it appears that the company has been able to meet these commitments with a current assets level of UK£172m, leading to a 1.93x current account ratio. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does DSCV face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 60%, DSCV can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether DSCV 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 DSCV’s, case, the ratio of 7.79x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DSCV ample headroom to grow its debt facilities.
Although DSCV’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how DSCV has been performing in the past. I recommend you continue to research discoverIE Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DSCV’s future growth? Take a look at our free research report of analyst consensus for DSCV’s outlook.
- Valuation: What is DSCV 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 DSCV 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.
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 email@example.com.