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Investors are always looking for growth in small-cap stocks like Dycom Industries, Inc. (NYSE:DY), with a market cap of US$1.8b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into DY here.
DY’s Debt (And Cash Flows)
DY has built up its total debt levels in the last twelve months, from US$761m to US$948m , which includes long-term debt. With this rise in debt, DY's cash and short-term investments stands at US$48m , ready to be used for running the business. Moreover, DY has generated US$44m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 4.6%, signalling that DY’s debt is not covered by operating cash.
Does DY’s liquid assets cover its short-term commitments?
With current liabilities at US$342m, it appears that the company has been able to meet these commitments with a current assets level of US$1.2b, leading to a 3.45x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can DY service its debt comfortably?
With total debt exceeding equity, DY is considered a highly levered company. 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 DY’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 DY, the ratio of 2.47x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as DY’s low interest coverage already puts the company at higher risk of default.
Although DY’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for DY's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Dycom Industries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DY’s future growth? Take a look at our free research report of analyst consensus for DY’s outlook.
- Valuation: What is DY 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 DY 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 email@example.com. 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.