While small-cap stocks, such as DMC Global Inc. (NASDAQ:BOOM) with its market cap of US$669m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I recommend you dig deeper yourself into BOOM here.
BOOM’s Debt (And Cash Flows)
BOOM has built up its total debt levels in the last twelve months, from US$18m to US$41m , which includes long-term debt. With this rise in debt, BOOM currently has US$13m remaining in cash and short-term investments to keep the business going. Moreover, BOOM has generated US$28m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 67%, indicating that BOOM’s current level of operating cash is high enough to cover debt.
Does BOOM’s liquid assets cover its short-term commitments?
Looking at BOOM’s US$65m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.05x. The current ratio is the number you get when you divide current assets by current liabilities. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is BOOM’s debt level acceptable?
BOOM’s level of debt is appropriate relative to its total equity, at 31%. This range is considered safe as BOOM is not taking on too much debt obligation, which may be constraining for future growth. We can test if BOOM’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 BOOM, the ratio of 31.11x suggests that interest is comfortably 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.
BOOM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how BOOM has been performing in the past. I recommend you continue to research DMC Global to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BOOM’s future growth? Take a look at our free research report of analyst consensus for BOOM’s outlook.
- Valuation: What is BOOM 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 BOOM 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.
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