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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Darling Ingredients Inc. (NYSE:DAR) with a market-capitalization of US$3.1b, rarely draw their attention. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. DAR’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Darling Ingredients’s financial health, so you should conduct further analysis into DAR here.
Does DAR Produce Much Cash Relative To Its Debt?
Over the past year, DAR has maintained its debt levels at around US$1.8b which accounts for long term debt. At this current level of debt, DAR's cash and short-term investments stands at US$96m to keep the business going. Additionally, DAR has produced cash from operations of US$420m during the same period of time, leading to an operating cash to total debt ratio of 23%, indicating that DAR’s debt is appropriately covered by operating cash.
Can DAR pay its short-term liabilities?
Looking at DAR’s US$546m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$871m, with a current ratio of 1.6x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food 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.
Can DAR service its debt comfortably?
With debt reaching 77% of equity, DAR may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In DAR's case, the ratio of 1.21x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as DAR’s low interest coverage already puts the company at higher risk of default.
Although DAR’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 DAR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Darling Ingredients to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DAR’s future growth? Take a look at our free research report of analyst consensus for DAR’s outlook.
- Valuation: What is DAR 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 DAR 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.