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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as DS Smith Plc (LON:SMDS) with a market-capitalization of UK£4.5b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at SMDS’s debt concentration and assess their financial liquidity 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 top-level understanding, so I encourage you to look further into SMDS here.
Does SMDS Produce Much Cash Relative To Its Debt?
SMDS has built up its total debt levels in the last twelve months, from UK£2.0b to UK£2.1b , which includes long-term debt. With this growth in debt, SMDS's cash and short-term investments stands at UK£435m to keep the business going. Additionally, SMDS has produced cash from operations of UK£494m during the same period of time, leading to an operating cash to total debt ratio of 23%, signalling that SMDS’s operating cash is sufficient to cover its debt.
Can SMDS pay its short-term liabilities?
Looking at SMDS’s UK£2.3b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£3.2b, with a current ratio of 1.39x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Packaging companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can SMDS service its debt comfortably?
SMDS is a relatively highly levered company with a debt-to-equity of 66%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SMDS’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. For SMDS, the ratio of 7.95x 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.
SMDS’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. Keep in mind I haven't considered other factors such as how SMDS has been performing in the past. I suggest you continue to research DS Smith to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SMDS’s future growth? Take a look at our free research report of analyst consensus for SMDS’s outlook.
- Valuation: What is SMDS 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 SMDS 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 email@example.com. 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.