While small-cap stocks, such as Drozapol-Profil SA. (WSE:DPL) with its market cap of ZŁ9.96M, 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 DPL is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into DPL here.
Does DPL generate enough cash through operations?
Over the past year, DPL has maintained its debt levels at around ZŁ5.05M made up of predominantly near term debt. At this current level of debt, DPL currently has ZŁ2.60M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of DPL’s operating efficiency ratios such as ROA here.
Can DPL pay its short-term liabilities?
With current liabilities at ZŁ16.76M, the company has been able to meet these commitments with a current assets level of ZŁ27.17M, leading to a 1.62x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does DPL face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 7.74%, DPL’s debt level is relatively low. DPL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is extremely low for DPL, and the company also has the ability and headroom to increase debt if needed going forward.
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DPL’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure DPL has company-specific issues impacting its capital structure decisions. You should continue to research Drozapol-Profil to get a better picture of the stock by looking at: