How Financially Strong Is DASAN Zhone Solutions Inc (NASDAQ:DZSI)?
Investors are always looking for growth in small-cap stocks like DASAN Zhone Solutions Inc (NASDAQ:DZSI), with a market cap of $152.01M. However, an important fact which most ignore is: how financially healthy is the business? Communications companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into DZSI here.
Does DZSI generate an acceptable amount of cash through operations?
DZSI has built up its total debt levels in the last twelve months, from $21.8M to $24.4M , which is made up of current and long term debt. With this rise in debt, DZSI currently has $18.9M remaining in cash and short-term investments , ready to deploy into the business. Additionally, DZSI has generated cash from operations of $3.5M over the same time period, leading to an operating cash to total debt ratio of 14.33%, signalling that DZSI’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In DZSI’s case, it is able to generate 0.14x cash from its debt capital.
Can DZSI meet its short-term obligations with the cash in hand?
With current liabilities at $67.8M, the company has been able to meet these commitments with a current assets level of $124.6M, leading to a 1.84x current account ratio. Usually, for Communications 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.
Is DZSI’s debt level acceptable?
DZSI is a relatively highly levered company with a debt-to-equity of 40.57%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since DZSI is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, DZSI 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. This is only a rough assessment of financial health, and I’m sure DZSI has company-specific issues impacting its capital structure decisions. You should continue to research DASAN Zhone Solutions to get a more holistic view of the stock by looking at:
1. Historical Performance: What has DZSI’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.
2. 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.
