Investors are always looking for growth in small-cap stocks like Dorel Industries Inc (TSE:DII.B), with a market cap of US$747.66m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into DII.B here.
How much cash does DII.B generate through its operations?
DII.B's debt levels surged from US$495.56m to US$530.58m over the last 12 months , which is made up of current and long term debt. With this growth in debt, DII.B currently has US$34.86m remaining in cash and short-term investments for investing into the business. Moreover, DII.B has generated US$75.76m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14.28%, indicating that DII.B’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 DII.B’s case, it is able to generate 0.14x cash from its debt capital.
Can DII.B pay its short-term liabilities?
Looking at DII.B’s most recent US$584.22m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.13b, leading to a 1.93x current account ratio. For Consumer Durables companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is DII.B’s debt level acceptable?With a debt-to-equity ratio of 48.36%, DII.B can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if DII.B’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For DII.B, the ratio of 3.07x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DII.B ample headroom to grow its debt facilities.
DII.B’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. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how DII.B has been performing in the past. You should continue to research Dorel Industries to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DII.B’s future growth? Take a look at our free research report of analyst consensus for DII.B’s outlook.
- Valuation: What is DII.B 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 DII.B 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.
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.