Investors are always looking for growth in small-cap stocks like DWS Limited (ASX:DWS), with a market cap of AU$158m. 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 just a partial view of the stock, and I recommend you dig deeper yourself into DWS here.
DWS’s Debt (And Cash Flows)
Over the past year, DWS has ramped up its debt from AU$12m to AU$42m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$8.4m to keep the business going. Additionally, DWS has produced AU$16m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 38%, signalling that DWS’s current level of operating cash is high enough to cover debt.
Can DWS meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$26m, it appears that the company has been able to meet these obligations given the level of current assets of AU$34m, with a current ratio of 1.3x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can DWS service its debt comfortably?
With a debt-to-equity ratio of 58%, DWS can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DWS's case, the ratio of 13.06x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as DWS’s high interest coverage is seen as responsible and safe practice.
Although DWS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around DWS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DWS's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research DWS to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DWS’s future growth? Take a look at our free research report of analyst consensus for DWS’s outlook.
- Valuation: What is DWS 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 DWS is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.