Destination XL Group Inc (NASDAQ:DXLG) is a small-cap stock with a market capitalization of US$111.86M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Specialty Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into DXLG here.
Does DXLG generate an acceptable amount of cash through operations?
DXLG has shrunken its total debt levels in the last twelve months, from US$68.14M to US$63.10M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$5.57M , ready to deploy into the business. Additionally, DXLG has generated cash from operations of US$34.96M in the last twelve months, resulting in an operating cash to total debt ratio of 55.40%, signalling that DXLG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In DXLG’s case, it is able to generate 0.55x cash from its debt capital.
Can DXLG meet its short-term obligations with the cash in hand?
Looking at DXLG’s most recent US$115.70M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. Usually, for Specialty Retail companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does DXLG face the risk of succumbing to its debt-load?
DXLG is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since DXLG is presently 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.
DXLG’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure DXLG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Destination XL Group to get a more holistic view of the small-cap by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for DXLG’s future growth? Take a look at our free research report of analyst consensus for DXLG’s outlook.
- 2. Valuation: What is DXLG 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 DXLG is currently mispriced by the market.
- 3. 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.