【toadfish can holder】Are Casta Diva Group S.p.A.’s (BIT:CDG) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like Casta Diva Group S.p.A. (

BIT:CDG

),toadfish can holder with a market cap of €11m. However, an important fact which most ignore is: how financially healthy is the business? Since CDG is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you

dig deeper yourself into CDG here

.

Does CDG produce enough cash relative to debt?

Over the past year, CDG has ramped up its debt from €2.8m to €3.5m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at €649k 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 assess some of CDG’s

operating efficiency ratios such as ROA here

.

Can CDG pay its short-term liabilities?

With current liabilities at €9.9m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.06x. Usually, for Entertainment companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

BIT:CDG Historical Debt January 2nd 19

Is CDG’s debt level acceptable?

With a debt-to-equity ratio of 52%, CDG can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since CDG is presently loss-making, sustainability of its current state of operations becomes a concern. 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:

CDG’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. Since there is also no concerns around CDG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CDG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Casta Diva Group to get a more holistic view of the small-cap by looking at:

Story continues

Historical Performance

: What has CDG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at

the free visual representations of our analysis

for more clarity.

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

[email protected]

.

View comments