Does Delphi Energy Corp’s (TSX:DEE) Debt Level Pose A Serious Problem?

While small-cap stocks, such as Delphi Energy Corp (TSX:DEE) with its market cap of CAD CA$237.32M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for Delphi Energy

How does DEE’s operating cash flow stack up against its debt?

TSX:DEE Historical Debt Nov 10th 17
TSX:DEE Historical Debt Nov 10th 17
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of DEE, operating cash flow turned out to be 0.32x its debt level over the past twelve months. A ratio of over a 0.25x is a positive sign and shows that DEE is generating ample cash from its core business, which should increase its potential to pay back near-term debt.

Does DEE’s liquid assets cover its short-term commitments?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, DEE may need to liquidate its short-term assets to meet these upcoming payments. We test for DEE’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that DEE is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.

Does DEE face the risk of succumbing to its debt-load?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of DEE, the debt-to-equity ratio is 47.80%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.

Next Steps:

Are you a shareholder? Although DEE’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. Though its low liquidity raises concerns over whether short term obligations can be met in time, and increasing debt funding to meet these needs could prove difficult. Moving forward, its financial position may be different. You should always be keeping abreast of market expectations for DEE’s future growth on our free analysis platform.

Are you a potential investor? DEE’s high debt level shouldn’t scare off investors just yet. Its operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In order to build your conviction in the stock, you need to further analyse DEE’s track record. You should continue your analysis by taking a look at DEE’s past performance analysis on our free platform to figure out DEE’s financial health position.