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While small-cap stocks, such as Digigram S.A. (EPA:DIG) with its market cap of €1.7m, 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 DIG is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into DIG here.
DIG’s Debt (And Cash Flows)
DIG has built up its total debt levels in the last twelve months, from €1.3m to €1.4m , which accounts for long term debt. With this growth in debt, DIG's cash and short-term investments stands at €472k to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of DIG’s operating efficiency ratios such as ROA here.
Can DIG meet its short-term obligations with the cash in hand?
With current liabilities at €1.5m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.29x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Tech companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can DIG service its debt comfortably?
Since total debt levels exceed equity, DIG is a highly leveraged company. 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 presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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 Digigram to get a better picture of the small-cap by looking at: