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Dixon Technologies (India) Limited (NSEI:DIXON) is a small-cap stock with a market capitalization of ₹40.95B. 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? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into DIXON here.
How does DIXON’s operating cash flow stack up against its debt?
DIXON has shrunken its total debt levels in the last twelve months, from ₹768.45M to ₹464.66M , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at ₹27.14M , ready to deploy into the business. Additionally, DIXON has produced cash from operations of ₹546.11M during the same period of time, resulting in an operating cash to total debt ratio of 117.53%, signalling that DIXON’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 DIXON’s case, it is able to generate 1.18x cash from its debt capital.
Can DIXON meet its short-term obligations with the cash in hand?
Looking at DIXON’s most recent ₹5.77B liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹6.37B, leading to a 1.1x current account ratio. For Consumer Durables companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is DIXON’s debt level acceptable?
With debt at 26.80% of equity, DIXON may be thought of as appropriately levered. This range is considered safe as DIXON is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if DIXON’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 DIXON, the ratio of 10.05x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.