While small-cap stocks, such as Diversicare Healthcare Services Inc (NASDAQ:DVCR) with its market cap of US$44.39M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Healthcare industry, especially ones that are currently loss-making, are inclined towards being 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into DVCR here.
How does DVCR’s operating cash flow stack up against its debt?
DVCR’s debt levels surged from US$79.99M to US$87.67M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, DVCR currently has US$3.52M remaining in cash and short-term investments for investing into the business. On top of this, DVCR has produced US$12.06M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 13.76%, signalling that DVCR’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In DVCR’s case, it is able to generate 0.14x cash from its debt capital.
Can DVCR pay its short-term liabilities?
Looking at DVCR’s most recent US$64.27M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$72.66M, with a current ratio of 1.13x. For Healthcare companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does DVCR face the risk of succumbing to its debt-load?
DVCR is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since DVCR is currently unprofitable, 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.
At its current level of cash flow coverage, DVCR has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for DVCR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Diversicare Healthcare Services to get a more holistic view of the stock by looking at:
- Valuation: What is DVCR 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 DVCR is currently mispriced by the market.
- Historical Performance: What has DVCR’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.
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.