The size of Dover Corporation (NYSE:DOV), a US$12b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Dover’s financial liquidity and leverage to give you an idea of Dover’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into DOV here.
How much cash does DOV generate through its operations?
DOV has shrunken its total debt levels in the last twelve months, from US$3.5b to US$3.3b , which includes long-term debt. With this debt repayment, DOV’s cash and short-term investments stands at US$209m for investing into the business. Moreover, DOV has generated US$744m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 23%, signalling that DOV’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DOV’s case, it is able to generate 0.23x cash from its debt capital.
Can DOV meet its short-term obligations with the cash in hand?
With current liabilities at US$1.9b, it seems that the business has been able to meet these commitments with a current assets level of US$2.5b, leading to a 1.3x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is DOV’s debt level acceptable?
Since equity is smaller than total debt levels, Dover is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether DOV is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In DOV’s case, the ratio of 8.03x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like DOV are considered a risk-averse investment.
At its current level of cash flow coverage, DOV has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure DOV has company-specific issues impacting its capital structure decisions. I recommend you continue to research Dover to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DOV’s future growth? Take a look at our free research report of analyst consensus for DOV’s outlook.
- Valuation: What is DOV 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 DOV 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.