What You Must Know About Dreamscape Networks Limited’s (ASX:DN8) Financial Strength
Investors are always looking for growth in small-cap stocks like Dreamscape Networks Limited (ASX:DN8), with a market cap of AU$33m. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into DN8 here.
Does DN8 produce enough cash relative to debt?
Over the past year, DN8 has borrowed debt capital of around AU$12m – which includes long-term debt. With this growth in debt, DN8’s cash and short-term investments stands at AU$5.6m , ready to deploy into the business. On top of this, DN8 has produced AU$7.9m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 67%, indicating that DN8’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 DN8’s case, it is able to generate 0.67x cash from its debt capital.
Does DN8’s liquid assets cover its short-term commitments?
With current liabilities at AU$30m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.41x.
Is DN8’s debt level acceptable?
DN8 is a relatively highly levered company with a debt-to-equity of 94%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether DN8 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DN8’s, case, the ratio of 9.86x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DN8’s high interest coverage is seen as responsible and safe practice.
Next Steps:
DN8’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure DN8 has company-specific issues impacting its capital structure decisions. You should continue to research Dreamscape Networks to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DN8’s future growth? Take a look at our free research report of analyst consensus for DN8’s outlook.
Valuation: What is DN8 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 DN8 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
