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What does Dechra Pharmaceuticals plc’s (LON:DPH) Balance Sheet Tell Us About Its Future?

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  • DPH.L

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Dechra Pharmaceuticals plc (LSE:DPH), with a market cap of UK£2.61B, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine DPH’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into DPH here. Check out our latest analysis for Dechra Pharmaceuticals

How does DPH’s operating cash flow stack up against its debt?

Over the past year, DPH has ramped up its debt from UK£155.82M to UK£181.16M , which comprises of short- and long-term debt. With this growth in debt, DPH currently has UK£61.20M remaining in cash and short-term investments for investing into the business. On top of this, DPH has produced cash from operations of UK£77.43M during the same period of time, leading to an operating cash to total debt ratio of 42.74%, meaning that DPH’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 DPH’s case, it is able to generate 0.43x cash from its debt capital.

Can DPH meet its short-term obligations with the cash in hand?

With current liabilities at UK£66.41M, it seems that the business has been able to meet these commitments with a current assets level of UK£184.98M, leading to a 2.79x current account ratio. Usually, for Pharmaceuticals 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.

LSE:DPH Historical Debt Mar 4th 18
LSE:DPH Historical Debt Mar 4th 18

Does DPH face the risk of succumbing to its debt-load?

DPH is a relatively highly levered company with a debt-to-equity of 55.36%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 DPH’s case, the ratio of 9.08x 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.

Next Steps:

DPH’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. This is only a rough assessment of financial health, and I’m sure DPH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Dechra Pharmaceuticals to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DPH’s future growth? Take a look at our free research report of analyst consensus for DPH’s outlook.

  2. Valuation: What is DPH 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 DPH is currently mispriced by the market.

  3. 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 pass 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.