Investors are always looking for growth in small-cap stocks like Dürkopp Adler AG (DB:DKA), with a market cap of €313.24M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into DKA here.

Does DKA generate enough cash through operations?

DKA’s debt levels have fallen from €6.98M to €4.21M over the last 12 months – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at €48.09M for investing into the business. Moreover, DKA has generated cash from operations of €24.40M over the same time period, resulting in an operating cash to total debt ratio of 580.08%, meaning that DKA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DKA’s case, it is able to generate 5.8x cash from its debt capital.

Can DKA meet its short-term obligations with the cash in hand?

At the current liabilities level of €28.85M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €110.01M, with a current ratio of 3.81x. However, anything above 3x is considered high and could mean that DKA has too much idle capital in low-earning investments.

Can DKA service its debt comfortably?

DKA’s level of debt is low relative to its total equity, at 7.92%. DKA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.

Next Steps:

DKA’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure DKA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Dürkopp Adler to get a better picture of the stock by looking at:

• 1. Historical Performance: What has DKA’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.

• 2. 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 pass 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.