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Investors are always looking for growth in small-cap stocks like Digital360 S.p.A. (BIT:DIG), with a market cap of €16m. However, an important fact which most ignore is: how financially healthy is the business? Given that DIG is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into DIG here.
Does DIG Produce Much Cash Relative To Its Debt?
Over the past year, DIG has ramped up its debt from €4.3m to €6.1m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €1.9m , ready to be used for running the business. Additionally, DIG has produced €1.6m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26%, signalling that DIG’s current level of operating cash is high enough to cover debt.
Can DIG meet its short-term obligations with the cash in hand?
At the current liabilities level of €7.1m, the company has been able to meet these obligations given the level of current assets of €12m, with a current ratio of 1.66x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Media companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DIG service its debt comfortably?
With debt reaching 71% of equity, DIG may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since DIG is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although DIG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around DIG's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DIG's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Digital360 to get a better picture of the small-cap by looking at: