While small-cap stocks, such as Dignity plc (LSE:DTY) with its market cap of GBP £922.74M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these three small calculations tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into DTY here.
Does DTY generate enough cash through operations?
DTY has sustained its debt level by about £590M over the last 12 months comprising of short- and long-term debt. At this constant level of debt, DTY currently has £67M remaining in cash and short-term investments for investing into the business. Additionally, DTY has produced cash from operations of £81M over the same time period, resulting in an operating cash to total debt ratio of 0.14x, indicating that DTY’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DTY’s case, it is able to generate 0.14x cash from its debt capital.
Can DTY meet its short-term obligations with the cash in hand?
Looking at DTY’s most recent £75M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.47x. Usually, for diversified consumer services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can DTY service its debt comfortably?Since total debt levels have outpaced equities, DTY is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In DTY’s case, the ratio of 3.89x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DTY ample headroom to grow its debt facilities.
Are you a shareholder? DTY’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that DTY’s financial situation may change. I recommend keeping abreast of market expectations for DTY’s future growth on our free analysis platform.
Are you a potential investor? DTY’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. You should continue your analysis by taking a look at DTY’s past performance analysis on our free platform to figure out DTY’s financial health position.