Dromeas SA (ATH:DROME) is a small-cap stock with a market capitalization of €11m. 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? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into DROME here.
DROME’s Debt (And Cash Flows)
DROME's debt level has been constant at around €27m over the previous year which accounts for long term debt. At this stable level of debt, DROME's cash and short-term investments stands at €1.7m to keep the business going. On top of this, DROME has generated cash from operations of €1.2m during the same period of time, leading to an operating cash to total debt ratio of 4.3%, indicating that DROME’s current level of operating cash is not high enough to cover debt.
Can DROME pay its short-term liabilities?
Looking at DROME’s €9.7m in current liabilities, the company has been able to meet these commitments with a current assets level of €24m, leading to a 2.44x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does DROME face the risk of succumbing to its debt-load?
With total debt exceeding equity, DROME is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if DROME’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 DROME, the ratio of 1.05x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although DROME’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around DROME's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure DROME has company-specific issues impacting its capital structure decisions. You should continue to research Dromeas to get a better picture of the small-cap by looking at:
- Valuation: What is DROME 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 DROME is currently mispriced by the market.
- Historical Performance: What has DROME's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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