While small-cap stocks, such as Delta Technology Holdings Limited (NASDAQ:DELT) with its market cap of USD $10.97M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since DELT is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into DELT here.
Does DELT generate an acceptable amount of cash through operations?
Over the past year, DELT has maintained its debt levels at around $66M . At this constant level of debt, the current cash and short-term investment levels stands at $0M for investing into the business. Moreover, DELT has produced cash from operations of $0M over the same time period, leading to an operating cash to total debt ratio of 0.01x, meaning that DELT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In DELT’s case, it is able to generate 0.01x cash from its debt capital.
Can DELT meet its short-term obligations with the cash in hand?
Looking at DELT’s most recent $120M liabilities, the company has not been able to meet these commitments with a current assets level of $87M, leading to a 0.72x current account ratio. which is under the appropriate industry ratio of 3x.
Does DELT face the risk of succumbing to its debt-load?
DELT 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 DELT is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Are you a shareholder? With a high level of debt on its balance sheet, DELT could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for DELT to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. In the future, its financial position may be different. I suggest researching market expectations for DELT’s future growth on our free analysis platform.
Are you a potential investor? DELT’s high debt levels on top of low cash coverage of debt in addition to low liquidity coverage of short-term expenses may scare some investors away intially. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of DELT’s track record. I encourage you to continue your research by taking a look at DELT’s past performance analysis on our free platform to figure out DELT’s financial health position.
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.