Investors are always looking for growth in small-cap stocks like Dongfang Modern Agriculture Holding Group Limited (ASX:DFM), with a market cap of AUD A$329.98M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Dongfang Modern Agriculture Holding Group
Does DFM generate an acceptable amount of cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can DFM pay off what it owes to its debtholder by using only cash from its operational activities? Last year, DFM’s operating cash flow exceeded its debt obligations, which means DFM generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.
Can DFM meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, DFM may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that DFM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can DFM service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of DFM, the debt-to-equity ratio is 3.55%, which indicates that the company faces low risk associated with debt.
Next Steps:
Are you a shareholder? DFM has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, DFM’s financial situation may change. You should always be researching market expectations for DFM’s future growth on our free analysis platform.