Endava plc (NYSE:DAVA) is a small-cap stock with a market capitalization of US$1.2b. 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 IT industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into DAVA here.
How much cash does DAVA generate through its operations?
DAVA has shrunken its total debt levels in the last twelve months, from UK£29m to UK£20m , which comprises of short- and long-term debt. With this debt repayment, DAVA’s cash and short-term investments stands at UK£15m for investing into the business. Moreover, DAVA has produced cash from operations of UK£34m over the same time period, leading to an operating cash to total debt ratio of 172%, meaning that DAVA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DAVA’s case, it is able to generate 1.72x cash from its debt capital.
Can DAVA pay its short-term liabilities?
With current liabilities at UK£71m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.96x.
Is DAVA’s debt level acceptable?
DAVA’s level of debt is appropriate relative to its total equity, at 28%. This range is considered safe as DAVA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether DAVA 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 DAVA’s, case, the ratio of 49.66x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DAVA’s high interest coverage is seen as responsible and safe practice.
DAVA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure DAVA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Endava to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DAVA’s future growth? Take a look at our free research report of analyst consensus for DAVA’s outlook.
- Valuation: What is DAVA 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 DAVA 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.