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Dominion Hosting Holding Sp.A. (BIT:DHH) is a small-cap stock with a market capitalization of €9.94M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Internet companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into DHH here.
How does DHH’s operating cash flow stack up against its debt?
DHH has sustained its debt level by about €741.32K over the last 12 months made up of current and long term debt. At this stable level of debt, DHH currently has €3.93M remaining in cash and short-term investments , ready to deploy into the business. On top of this, DHH has produced €348.44K in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 47.00%, indicating that DHH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DHH’s case, it is able to generate 0.47x cash from its debt capital.
Does DHH’s liquid assets cover its short-term commitments?
At the current liabilities level of €1.77M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.63x. For Internet 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.
Is DHH’s debt level acceptable?
With a debt-to-equity ratio of 11.20%, DHH’s debt level may be seen as prudent. DHH is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether DHH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DHH’s, case, the ratio of 21.25x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DHH’s high interest coverage is seen as responsible and safe practice.