Data Respons ASA (OB:DAT) is a small-cap stock with a market capitalization of øre1.47b. 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 IT industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into DAT here.
How does DAT’s operating cash flow stack up against its debt?
DAT’s debt levels surged from øre116.70m to øre216.20m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at øre44.00m , ready to deploy into the business. Additionally, DAT has generated cash from operations of øre53.34m over the same time period, leading to an operating cash to total debt ratio of 24.67%, indicating that DAT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DAT’s case, it is able to generate 0.25x cash from its debt capital.
Does DAT’s liquid assets cover its short-term commitments?
Looking at DAT’s most recent øre395.60m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.09x. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does DAT face the risk of succumbing to its debt-load?With debt reaching 55.34% of equity, DAT may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In DAT’s case, the ratio of 6.42x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DAT ample headroom to grow its debt facilities.
DAT’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how DAT has been performing in the past. I recommend you continue to research Data Respons to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DAT’s future growth? Take a look at our free research report of analyst consensus for DAT’s outlook.
- Valuation: What is DAT 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 DAT 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.