Distribuidora Internacional de Alimentación SA (BME:DIA) is a small-cap stock with a market capitalization of €1.59b. 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? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into DIA here.
Does DIA produce enough cash relative to debt?
DIA has sustained its debt level by about €1.23b over the last 12 months comprising of short- and long-term debt. At this stable level of debt, DIA’s cash and short-term investments stands at €342.29m , ready to deploy into the business. Additionally, DIA has produced €362.07m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 29.40%, signalling that DIA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DIA’s case, it is able to generate 0.29x cash from its debt capital.
Can DIA pay its short-term liabilities?
Looking at DIA’s most recent €2.29b liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.55x, which is below the prudent industry ratio of 3x.
Can DIA service its debt comfortably?DIA is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether DIA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DIA’s, case, the ratio of 5.09x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DIA ample headroom to grow its debt facilities.
Although DIA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, 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 DIA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Distribuidora Internacional de Alimentación to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DIA’s future growth? Take a look at our free research report of analyst consensus for DIA’s outlook.
- Valuation: What is DIA 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 DIA 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.