Investors are always looking for growth in small-cap stocks like Domain Holdings Australia Limited (ASX:DHG), with a market cap of AU$1.4b. However, an important fact which most ignore is: how financially healthy is the business? Given that DHG is not presently profitable, it’s vital to evaluate 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into DHG here.
Does DHG produce enough cash relative to debt?
In the previous 12 months, DHG’s rose by about AU$187m including long-term debt. With this growth in debt, DHG currently has AU$61m remaining in cash and short-term investments , ready to deploy into the business. Moreover, DHG has generated cash from operations of AU$46m during the same period of time, resulting in an operating cash to total debt ratio of 25%, indicating that DHG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In DHG’s case, it is able to generate 0.25x cash from its debt capital.
Does DHG’s liquid assets cover its short-term commitments?
With current liabilities at AU$67m, it appears that the company has been able to meet these commitments with a current assets level of AU$124m, leading to a 1.85x current account ratio. Usually, for Interactive Media and Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DHG service its debt comfortably?
DHG’s level of debt is appropriate relative to its total equity, at 14%. DHG is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for DHG, and the company also has the ability and headroom to increase debt if needed going forward.
DHG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure DHG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Domain Holdings Australia to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DHG’s future growth? Take a look at our free research report of analyst consensus for DHG’s outlook.
- Valuation: What is DHG 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 DHG 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.