While small-cap stocks, such as Delarka Holding AB (publ) (STO:DELARK) with its market cap of kr575m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into DELARK here.
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DELARK’s Debt (And Cash Flows)
DELARK has sustained its debt level by about kr714m over the last 12 months including long-term debt. At this stable level of debt, DELARK currently has kr33m remaining in cash and short-term investments , ready to be used for running the business. Moreover, DELARK has generated cash from operations of kr60m in the last twelve months, resulting in an operating cash to total debt ratio of 8.4%, meaning that DELARK’s current level of operating cash is not high enough to cover debt.
Can DELARK pay its short-term liabilities?
With current liabilities at kr36m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is calculated by dividing current assets by current liabilities.
Can DELARK service its debt comfortably?
DELARK is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if DELARK’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 DELARK, the ratio of 4.55x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as DELARK’s high interest coverage is seen as responsible and safe practice.
Although DELARK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for DELARK's financial health. Other important fundamentals need to be considered alongside. You should continue to research Delarka Holding to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DELARK’s future growth? Take a look at our free research report of analyst consensus for DELARK’s outlook.
- Valuation: What is DELARK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DELARK is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.