What Investors Should Know About China Distance Education Holdings Limited’s (NYSE:DL) Financial Strength
Investors are always looking for growth in small-cap stocks like China Distance Education Holdings Limited (NYSE:DL), with a market cap of $305.57M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into DL here.
Does DL generate an acceptable amount of cash through operations?
DL has built up its total debt levels in the last twelve months, from $15.6M to $49.9M – this includes both the current and long-term debt. With this growth in debt, DL’s cash and short-term investments stands at $65.8M , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of DL’s operating efficiency ratios such as ROA here.
Can DL pay its short-term liabilities?
At the current liabilities level of $128.7M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.93x, which is below the prudent industry ratio of 3x.
Does DL face the risk of succumbing to its debt-load?
With debt reaching 68.53% of equity, DL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
Are you a shareholder? DL’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. However, its lack of liquidity means the company may be pressed to meet its short-term obligations, and increasing debt funding to meet these needs could prove difficult. Moving forward, its financial position may change. I suggest keeping abreast of market expectations for DL’s future growth on our free analysis platform.
Are you a potential investor? Investors shouldn’t be put off by DL’s high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. However, the company may struggle to meet its near term liabilities should an adverse event occur. To gain more conviction in the stock, you need to further analyse DL’s track record. You should continue your analysis by taking a look at DL’s past performance analysis on our free platform to figure out DL’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.
