Investors are always looking for growth in small-cap stocks like Deltic Timber Corporation (NYSE:DEL), with a market cap of US$1.20B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into DEL here.
Does DEL generate an acceptable amount of cash through operations?
DEL’s debt level has been constant at around US$228.85M over the previous year – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$10.15M , ready to deploy into the business. Additionally, DEL has produced cash from operations of US$43.70M in the last twelve months, resulting in an operating cash to total debt ratio of 19.10%, indicating that DEL’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DEL’s case, it is able to generate 0.19x cash from its debt capital.
Does DEL’s liquid assets cover its short-term commitments?
With current liabilities at US$29.57M, it appears that the company has been able to meet these obligations given the level of current assets of US$45.00M, with a current ratio of 1.52x. Generally, for Forestry companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is DEL’s debt level acceptable?
With debt reaching 90.34% of equity, DEL 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. We can check to see whether DEL 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 DEL’s, case, the ratio of 2x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as DEL’s low interest coverage already puts the company at higher risk of default.
DEL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how DEL has been performing in the past. You should continue to research Deltic Timber to get a better picture of the stock by looking at:
- Valuation: What is DEL 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 DEL is currently mispriced by the market.
- Historical Performance: What has DEL’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.
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.