Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as DST Systems Inc (NYSE:DST), with a market cap of US$4.96b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine DST’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 DST here. View out our latest analysis for DST Systems
How does DST’s operating cash flow stack up against its debt?
Over the past year, DST has ramped up its debt from US$508.20m to US$620.80m , which comprises of short- and long-term debt. With this rise in debt, DST currently has US$80.50m remaining in cash and short-term investments for investing into the business. On top of this, DST has generated cash from operations of US$151.90m over the same time period, leading to an operating cash to total debt ratio of 24.47%, signalling that DST’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DST’s case, it is able to generate 0.24x cash from its debt capital.
Does DST’s liquid assets cover its short-term commitments?
Looking at DST’s most recent US$971.30m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.04b, leading to a 1.07x current account ratio. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does DST face the risk of succumbing to its debt-load?
DST is a relatively highly levered company with a debt-to-equity of 50.02%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether DST is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DST’s, case, the ratio of 13.24x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DST’s high interest coverage is seen as responsible and safe practice.
DST’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure DST has company-specific issues impacting its capital structure decisions. You should continue to research DST Systems to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DST’s future growth? Take a look at our free research report of analyst consensus for DST’s outlook.
- Valuation: What is DST 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 DST 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 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.