Investors are always looking for growth in small-cap stocks like Damiani SpA (BIT:DMN), with a market cap of €69.3m. However, an important fact which most ignore is: how financially healthy is the business? Given that DMN is not presently profitable, it’s crucial to evaluate 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into DMN here.
How does DMN’s operating cash flow stack up against its debt?
DMN has built up its total debt levels in the last twelve months, from €63.5m to €68.1m , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at €10.8m , ready to deploy into the business. Moreover, DMN has produced €1.5m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 2.2%, meaning that DMN’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In DMN’s case, it is able to generate 0.022x cash from its debt capital.
Does DMN’s liquid assets cover its short-term commitments?
With current liabilities at €88.9m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.73x. Usually, for Luxury companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does DMN face the risk of succumbing to its debt-load?
DMN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since DMN 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:
At its current level of cash flow coverage, DMN has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for DMN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Damiani to get a more holistic view of the stock by looking at: