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Dillard’s, Inc. (NYSE:DDS) is a small-cap stock with a market capitalization of US$1.7b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Multiline Retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into DDS here.
How much cash does DDS generate through its operations?
DDS’s debt levels have fallen from US$818m to US$760m over the last 12 months – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$78m for investing into the business. Additionally, DDS has produced US$288m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 38%, signalling that DDS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DDS’s case, it is able to generate 0.38x cash from its debt capital.
Can DDS pay its short-term liabilities?
At the current liabilities level of US$1.5b, the company has been able to meet these commitments with a current assets level of US$2.3b, leading to a 1.49x current account ratio. For Multiline Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can DDS service its debt comfortably?
With debt reaching 47% of equity, DDS may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if DDS’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 DDS, the ratio of 5.1x 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.
DDS’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. Since there is also no concerns around DDS’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DDS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Dillard’s to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DDS’s future growth? Take a look at our free research report of analyst consensus for DDS’s outlook.
- Valuation: What is DDS 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 DDS 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.