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While small-cap stocks, such as Digital Ally Inc (NASDAQ:DGLY) with its market cap of US$18.61M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into DGLY here.
Does DGLY generate an acceptable amount of cash through operations?
DGLY’s debt levels surged from US$4.04M to US$4.28M over the last 12 months , which is made up of current and long term debt. With this growth in debt, DGLY currently has US$54.71K remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of DGLY’s operating efficiency ratios such as ROA here.
Can DGLY meet its short-term obligations with the cash in hand?
At the current liabilities level of US$10.15M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$11.83M, leading to a 1.17x current account ratio. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is DGLY’s debt level acceptable?
Since total debt levels have outpaced equities, DGLY is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since DGLY is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
DGLY’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for DGLY’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Digital Ally to get a better picture of the stock by looking at: