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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as The Descartes Systems Group Inc (TSE:DSG), with a market capitalization of CA$3.1b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. DSG’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DSG here.
Check out our latest analysis for Descartes Systems Group
How much cash does DSG generate through its operations?
Over the past year, DSG has ramped up its debt from US$40m to US$59m – this includes both the current and long-term debt. With this growth in debt, DSG’s cash and short-term investments stands at US$34m for investing into the business. Moreover, DSG has produced cash from operations of US$76m during the same period of time, leading to an operating cash to total debt ratio of 129%, meaning that DSG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DSG’s case, it is able to generate 1.29x cash from its debt capital.
Does DSG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$71m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$78m, leading to a 1.1x current account ratio. Usually, for Software 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 DSG face the risk of succumbing to its debt-load?
With debt at 11% of equity, DSG may be thought of as appropriately levered. DSG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if DSG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For DSG, the ratio of 23.06x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DSG’s high interest coverage is seen as responsible and safe practice.