Are DATA Communications Management Corp's (TSE:DCM) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like DATA Communications Management Corp (TSE:DCM), with a market cap of CA$36.01m. However, an important fact which most ignore is: how financially healthy is the business? Given that DCM is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into DCM here.

Does DCM produce enough cash relative to debt?

Over the past year, DCM has ramped up its debt from CA$46.12m to CA$66.00m , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$0 , ready to deploy into the business. Additionally, DCM has produced cash from operations of CA$3.91m during the same period of time, resulting in an operating cash to total debt ratio of 5.92%, signalling that DCM’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In DCM’s case, it is able to generate 0.059x cash from its debt capital.

Can DCM meet its short-term obligations with the cash in hand?

With current liabilities at CA$68.65m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.21x. Generally, for Commercial Services companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

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

Since total debt levels have outpaced equities, DCM 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. But since DCM is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

DCM’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure DCM has company-specific issues impacting its capital structure decisions. I suggest you continue to research DATA Communications Management to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for DCM’s future growth? Take a look at our free research report of analyst consensus for DCM’s outlook.
2. Historical Performance: What has DCM'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.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.