Investors are always looking for growth in small-cap stocks like Document Security Systems, Inc. (NYSEMKT:DSS), with a market cap of US$20m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into DSS here.
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DSS’s Debt (And Cash Flows)
Over the past year, DSS has reduced its debt from US$6.2m to US$3.8m , which includes long-term debt. With this debt payback, DSS currently has US$1.3m remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of DSS’s operating efficiency ratios such as ROA here.
Can DSS pay its short-term liabilities?
With current liabilities at US$5.1m, the company has been able to meet these obligations given the level of current assets of US$5.6m, with a current ratio of 1.09x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Commercial Services companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can DSS service its debt comfortably?
With a debt-to-equity ratio of 49%, DSS can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.
DSS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around DSS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DSS's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Document Security Systems to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DSS’s future growth? Take a look at our free research report of analyst consensus for DSS’s outlook.
- Historical Performance: What has DSS'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.
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