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Investors pursuing a solid, dependable stock investment can often be led to Deutsche Post AG (ETR:DPW), a large-cap worth €36b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Deutsche Post’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into DPW here.
Does DPW Produce Much Cash Relative To Its Debt?
DPW has built up its total debt levels in the last twelve months, from €15b to €17b – this includes long-term debt. With this increase in debt, DPW currently has €3.9b remaining in cash and short-term investments , ready to be used for running the business. Additionally, DPW has produced cash from operations of €5.7b in the last twelve months, leading to an operating cash to total debt ratio of 34%, indicating that DPW’s current level of operating cash is high enough to cover debt.
Can DPW meet its short-term obligations with the cash in hand?
Looking at DPW’s €16b in current liabilities, the company has been able to meet these commitments with a current assets level of €16b, leading to a 1.01x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Logistics companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does DPW face the risk of succumbing to its debt-load?
DPW is a relatively highly levered company with a debt-to-equity of 47%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if DPW’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. In DPW's case, the ratio of 6.12x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as DPW is a safe investment.
Although DPW’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. Since there is also no concerns around DPW's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DPW's financial health. Other important fundamentals need to be considered alongside. You should continue to research Deutsche Post to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DPW’s future growth? Take a look at our free research report of analyst consensus for DPW’s outlook.
- Valuation: What is DPW 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 DPW 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 firstname.lastname@example.org. 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.