Doray Minerals Limited (ASX:DRM) is a small-cap stock with a market capitalization of AU$159m. 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? Since DRM is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into DRM here.
Does DRM produce enough cash relative to debt?
Over the past year, DRM has reduced its debt from AU$52m to AU$21m – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at AU$24m , ready to deploy into the business. Moreover, DRM has generated cash from operations of AU$38m over the same time period, leading to an operating cash to total debt ratio of 181%, signalling that DRM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In DRM’s case, it is able to generate 1.81x cash from its debt capital.
Can DRM pay its short-term liabilities?
With current liabilities at AU$40m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. Usually, for Metals and Mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is DRM’s debt level acceptable?
With debt at 15% of equity, DRM may be thought of as appropriately levered. This range is considered safe as DRM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. DRM’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
DRM 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. I admit this is a fairly basic analysis for DRM’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Doray Minerals to get a more holistic view of the stock by looking at: