China Distance Education Holdings Limited (NYSE:DL) is a small-cap stock with a market capitalization of US$258.03M. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into DL here.
Does DL generate enough cash through operations?
DL has built up its total debt levels in the last twelve months, from US$15.55M to US$51.54M , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$67.03M , ready to deploy into the business. Additionally, DL has generated cash from operations of US$37.73M during the same period of time, resulting in an operating cash to total debt ratio of 73.20%, meaning that DL’s operating cash is sufficient to cover its debt. 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.
Can DL pay its short-term liabilities?
Looking at DL’s most recent US$128.71M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$119.84M, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Is DL’s debt level acceptable?
With debt reaching 92.49% of equity, DL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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. Keep in mind I haven’t considered other factors such as how DL has been performing in the past. I recommend you continue to research China Distance Education Holdings to get a better picture of the stock by looking at: