DIOD Maker of Eco-Friendly Equipment and Nutrition Public Joint Stock Company (MISX:DIOD) is a small-cap stock with a market capitalization of RUРУБ385.22M. 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? Companies operating in the Pharmaceuticals industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into DIOD here.
Does DIOD generate an acceptable amount of cash through operations?
DIOD has shrunken its total debt levels in the last twelve months, from RUРУБ22.64M to RUРУБ17.49M , which is made up of current and long term debt. With this debt repayment, DIOD’s cash and short-term investments stands at RUРУБ90.70M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of DIOD’s operating efficiency ratios such as ROA here.
Can DIOD meet its short-term obligations with the cash in hand?
With current liabilities at RUРУБ176.70M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.72x. However, anything above 3x is considered high and could mean that DIOD has too much idle capital in low-earning investments.
Is DIOD’s debt level acceptable?
DIOD’s level of debt is low relative to its total equity, at 2.87%. This range is considered safe as DIOD is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if DIOD’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 DIOD, the ratio of 0.4x 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.