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The size of Dover Corporation (NYSE:DOV), a US$14b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Dover’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DOV here.
Does DOV Produce Much Cash Relative To Its Debt?
Over the past year, DOV has maintained its debt levels at around US$3.5b – this includes long-term debt. At this constant level of debt, DOV's cash and short-term investments stands at US$243m , ready to be used for running the business. Additionally, DOV has generated cash from operations of US$788m during the same period of time, leading to an operating cash to total debt ratio of 23%, meaning that DOV’s operating cash is sufficient to cover its debt.
Can DOV meet its short-term obligations with the cash in hand?
At the current liabilities level of US$1.9b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can DOV service its debt comfortably?
With total debt exceeding equities, Dover is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. 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 assess the sustainability of DOV’s debt levels to the test by looking at how well interest payments are covered by earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For DOV, the ratio of 7.98x suggests that interest is well-covered. Large-cap investments like DOV are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
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 proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure DOV has company-specific issues impacting its capital structure decisions. I suggest you continue to research Dover to get a better picture 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.
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.