Investors are always looking for growth in small-cap stocks like Destination XL Group Inc (NASDAQ:DXLG), with a market cap of US$105.51m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into DXLG here.
How does DXLG’s operating cash flow stack up against its debt?
DXLG has shrunken its total debt levels in the last twelve months, from US$78.75m to US$70.29m – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$6.99m , ready to deploy into the business. On top of this, DXLG has produced US$29.68m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 42.22%, indicating that DXLG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In DXLG’s case, it is able to generate 0.42x cash from its debt capital.
Can DXLG meet its short-term obligations with the cash in hand?
With current liabilities at US$115.25m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. For Specialty Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does DXLG face the risk of succumbing to its debt-load?Since total debt levels have outpaced equities, DXLG is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since DXLG is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
DXLG’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how DXLG has been performing in the past. You should continue to research Destination XL Group to get a more holistic view of the small-cap by looking at:
- Valuation: What is DXLG 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 DXLG is currently mispriced by the market.
- Historical Performance: What has DXLG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 past 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.