Yahoo Finance Is Devro plc's (LON:DVO) Balance Sheet A Threat To Its Future?
Devro plc (LON:DVO) is a small-cap stock with a market capitalization of UK£304m. 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? Assessing first and foremost the financial health is crucial, 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, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into DVO here.
Does DVO Produce Much Cash Relative To Its Debt?
Over the past year, DVO has maintained its debt levels at around UK£152m including long-term debt. At this stable level of debt, DVO currently has UK£9.9m remaining in cash and short-term investments , ready to be used for running the business. Additionally, DVO has produced cash from operations of UK£26m during the same period of time, leading to an operating cash to total debt ratio of 17%, meaning that DVO’s debt is not covered by operating cash.
Can DVO pay its short-term liabilities?
At the current liabilities level of UK£41m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.05x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does DVO face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, DVO is a highly leveraged 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 check to see whether DVO 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 DVO's, case, the ratio of 5.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DVO ample headroom to grow its debt facilities.
Next Steps:
Although DVO’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 DVO's financial health. Other important fundamentals need to be considered alongside. You should continue to research Devro to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for DVO’s future growth? Take a look at our free research report of analyst consensus for DVO’s outlook.
Valuation: What is DVO 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 DVO 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.
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