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Duluth Holdings Inc. (NASDAQ:DLTH) is a small-cap stock with a market capitalization of US$852m. 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 Online Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into DLTH here.
How does DLTH’s operating cash flow stack up against its debt?
DLTH’s debt levels surged from US$73m to US$111m over the last 12 months , which accounts for long term debt. With this increase in debt, DLTH’s cash and short-term investments stands at US$2.5m for investing into the business. Additionally, DLTH has generated US$41m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 37%, indicating that DLTH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DLTH’s case, it is able to generate 0.37x cash from its debt capital.
Can DLTH meet its short-term obligations with the cash in hand?
With current liabilities at US$65m, it appears that the company has been able to meet these commitments with a current assets level of US$150m, leading to a 2.31x current account ratio. For Online Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can DLTH service its debt comfortably?
With a debt-to-equity ratio of 78%, DLTH can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In DLTH’s case, the ratio of 8.27x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DLTH’s high interest coverage is seen as responsible and safe practice.
Although DLTH’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. I admit this is a fairly basic analysis for DLTH’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Duluth Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DLTH’s future growth? Take a look at our free research report of analyst consensus for DLTH’s outlook.
- Valuation: What is DLTH 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 DLTH 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.
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.