While small-cap stocks, such as Diatreme Resources Limited (ASX:DRX) with its market cap of AU$20.99M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that DRX is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into DRX here.
Does DRX generate an acceptable amount of cash through operations?
DRX’s debt levels surged from AU$983.41K to AU$2.62M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, DRX’s cash and short-term investments stands at AU$310.36K for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of DRX’s operating efficiency ratios such as ROA here.
Can DRX meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$301.60K liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. For Metals and Mining 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.
Can DRX service its debt comfortably?
With a debt-to-equity ratio of 14.06%, DRX’s debt level may be seen as prudent. This range is considered safe as DRX is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with DRX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Although DRX’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how DRX has been performing in the past. I recommend you continue to research Diatreme Resources to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.