Are Dart Group PLC's (LON:DTG) Interest Costs Too High?

While small-cap stocks, such as Dart Group PLC (AIM:DTG) with its market cap of £1.02B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into DTG here.

Does DTG generate enough cash through operations?

DTG has built up its total debt levels in the last twelve months, from £90.9M to £520.5M – this includes both the current and long-term debt. With this growth in debt, DTG's cash and short-term investments stands at £689.0M for investing into the business. On top of this, DTG has generated £331.1M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 63.61%, indicating that DTG’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 DTG’s case, it is able to generate 0.64x cash from its debt capital.

Can DTG pay its short-term liabilities?

Looking at DTG’s most recent £1,396.9M liabilities, it appears that the company has been able to meet these commitments with a current assets level of £1,472.7M, leading to a 1.05x current account ratio. Generally, for airlines companies, this is a reasonable ratio as there's enough of a cash buffer without holding too capital in low return investments.

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

DTG is a relatively highly levered company with a debt-to-equity of 99.88%. 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 DTG 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 DTG's, case, the ratio of 14.78x suggests that interest is excessively covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Are you a shareholder? DTG’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. Since there is also no concerns around DTG's liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. I recommend keeping on top of market expectations for DTG's future growth on our free analysis platform.

Are you a potential investor? Investors shouldn't be put off by DTG's high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. To gain more conviction in the stock, you need to also analyse DTG's track record. I encourage you to continue your research by taking a look at DTG's past performance analysis on our free platform to conclude on DTG's financial health.

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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.