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Delphi Energy Corp. (TSE:DEE) is a small-cap stock with a market capitalization of CA$32m. 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? Since DEE is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into DEE here.
Does DEE Produce Much Cash Relative To Its Debt?
DEE’s debt levels surged from CA$130m to CA$180m over the last 12 months – this includes long-term debt. With this growth in debt, DEE currently has CA$700k remaining in cash and short-term investments , ready to be used for running the business. On top of this, DEE has generated CA$36m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 20%, meaning that DEE’s operating cash is sufficient to cover its debt.
Can DEE pay its short-term liabilities?
Looking at DEE’s CA$44m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of CA$32m, leading to a current ratio of 0.73x. The current ratio is the number you get when you divide current assets by current liabilities.
Can DEE service its debt comfortably?
Since total debt levels exceed equity, DEE is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since DEE is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
DEE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though 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 DEE has company-specific issues impacting its capital structure decisions. You should continue to research Delphi Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DEE’s future growth? Take a look at our free research report of analyst consensus for DEE’s outlook.
- Historical Performance: What has DEE’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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.