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Investors are always looking for growth in small-cap stocks like Digital Domain Holdings Limited (HKG:547), with a market cap of HK$2.8b. However, an important fact which most ignore is: how financially healthy is the business? Given that 547 is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 547 here.
How much cash does 547 generate through its operations?
547 has built up its total debt levels in the last twelve months, from HK$288m to HK$507m , which includes long-term debt. With this rise in debt, 547’s cash and short-term investments stands at HK$205m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 547’s operating efficiency ratios such as ROA here.
Can 547 meet its short-term obligations with the cash in hand?
Looking at 547’s HK$490m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of HK$447m, with a current ratio of 0.91x.
Is 547’s debt level acceptable?
With a debt-to-equity ratio of 31%, 547’s debt level may be seen as prudent. 547 is not taking on too much debt commitment, which may be constraining for future growth. 547’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
547’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure 547 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Digital Domain Holdings to get a more holistic view of the stock by looking at:
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Historical Performance: What has 547’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.
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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.