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Is discoverIE Group plc’s (LON:DSCV) Balance Sheet A Threat To Its Future?

Mercedes Harden

Investors are always looking for growth in small-cap stocks like discoverIE Group plc (LON:DSCV), with a market cap of UK£297.01m. 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 essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into DSCV here.

How much cash does DSCV generate through its operations?

Over the past year, DSCV has ramped up its debt from UK£51.00m to UK£74.30m , which comprises of short- and long-term debt. With this increase in debt, DSCV currently has UK£21.90m remaining in cash and short-term investments , ready to deploy into the business. Additionally, DSCV has generated cash from operations of UK£15.00m over the same time period, leading to an operating cash to total debt ratio of 20.19%, meaning that DSCV’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DSCV’s case, it is able to generate 0.2x cash from its debt capital.

Does DSCV’s liquid assets cover its short-term commitments?

Looking at DSCV’s most recent UK£93.40m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.78x. Usually, for Electronic companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:DSCV Historical Debt August 16th 18

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

With debt reaching 57.46% of equity, DSCV 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. We can test if DSCV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For DSCV, the ratio of 7.38x 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.

Next Steps:

DSCV’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how DSCV has been performing in the past. I suggest you continue to research discoverIE Group to get a more holistic view of the stock by looking at:

  1. 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.
  2. 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.
  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.