Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as DCC plc (LON:DCC), with a market capitalization of UK£5.7b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine DCC’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DCC here.
How much cash does DCC generate through its operations?
DCC has built up its total debt levels in the last twelve months, from UK£1.8b to UK£2.0b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at UK£978m , ready to deploy into the business. Additionally, DCC has produced UK£427m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 21%, meaning that DCC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DCC’s case, it is able to generate 0.21x cash from its debt capital.
Does DCC’s liquid assets cover its short-term commitments?
Looking at DCC’s UK£2.7b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£3.2b, leading to a 1.21x current account ratio. For Industrials 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.
Does DCC face the risk of succumbing to its debt-load?
DCC is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether DCC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DCC’s, case, the ratio of 9.36x suggests that interest is appropriately 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.
DCC’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. 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 DCC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research DCC to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DCC’s future growth? Take a look at our free research report of analyst consensus for DCC’s outlook.
- Valuation: What is DCC 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 DCC 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.
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 firstname.lastname@example.org.