AMCON Distributing Company (NYSEMKT:DIT) is a small-cap stock with a market capitalization of US$52m. 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? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into DIT here.
How does DIT’s operating cash flow stack up against its debt?
DIT’s debt levels surged from US$13m to US$23m over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, DIT’s cash and short-term investments stands at US$275k for investing into the business. On top of this, DIT has generated US$2m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 8.1%, meaning that DIT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DIT’s case, it is able to generate 0.081x cash from its debt capital.
Can DIT pay its short-term liabilities?
Looking at DIT’s most recent US$31m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.09x. However, a ratio greater than 3x may be considered as quite high, and some might argue DIT could be holding too much capital in a low-return investment environment.
Can DIT service its debt comfortably?
With a debt-to-equity ratio of 36%, DIT’s debt level may be seen as prudent. This range is considered safe as DIT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether DIT 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 DIT’s, case, the ratio of 5.44x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DIT’s high interest coverage is seen as responsible and safe practice.
Next Steps:
DIT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure DIT has company-specific issues impacting its capital structure decisions. You should continue to research AMCON Distributing to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DIT’s future growth? Take a look at our free research report of analyst consensus for DIT’s outlook.
- Valuation: What is DIT 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 DIT 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 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 editorial-team@simplywallst.com.