Deep-South Resources Inc (TSXV:DSM) is a small-cap stock with a market capitalization of CA$14.15M. 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? Given that DSM is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into DSM here.
Does DSM generate an acceptable amount of cash through operations?
DSM has built up its total debt levels in the last twelve months, from CA$229.28K to CA$312.12K , which is made up of current and long term debt. With this increase in debt, DSM’s cash and short-term investments stands at below CA$10K, which is concerning. On top of this, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of DSM’s operating efficiency ratios such as ROA here.
Can DSM meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$506.10K liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.041x, which is below the prudent industry ratio of 3x.
Can DSM service its debt comfortably?DSM’s level of debt is low relative to its total equity, at 7.89%. This range is considered safe as DSM is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is virtually non-existent with DSM, and the company has plenty of headroom and ability to raise debt should it need to in the future.
DSM’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure DSM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Deep-South Resources to get a more holistic view of the stock by looking at:
- Valuation: What is DSM 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 DSM is currently mispriced by the market.
- Historical Performance: What has DSM’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.