Is China Distance Education Holdings Limited’s (NYSE:DL) Balance Sheet Strong Enough To Weather A Storm?

While small-cap stocks, such as China Distance Education Holdings Limited (NYSE:DL) with its market cap of US$236.72m, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into DL here.

How much cash does DL generate through its operations?

DL has built up its total debt levels in the last twelve months, from US$15.55m to US$0 – this includes both the current and long-term debt. With this rise in debt, DL’s cash and short-term investments stands at US$67.03m , ready to deploy into the business. On top of this, DL has produced US$37.73m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 73.20%, signalling that DL’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 DL’s case, it is able to generate 0.73x cash from its debt capital.

Does DL’s liquid assets cover its short-term commitments?

With current liabilities at US$128.71m, the company is not able to meet these obligations given the level of current assets of US$119.84m, with a current ratio of 0.93x below the prudent level of 3x.

NYSE:DL Historical Debt June 21st 18
NYSE:DL Historical Debt June 21st 18

Can DL service its debt comfortably?

With debt reaching 92.49% of equity, DL 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 DL’s case, the ratio of 33.87x 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.

Next Steps:

DL’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for DL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Distance Education Holdings to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DL’s future growth? Take a look at our free research report of analyst consensus for DL’s outlook.
  2. Valuation: What is DL 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 DL is currently mispriced by the market.
  3. 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.