What You Must Know About Dana Incorporated’s (NYSE:DAN) Financial Strength
Stocks with market capitalization between $2B and $10B, such as Dana Incorporated (NYSE:DAN) with a size of US$2.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at DAN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Dana’s financial health, so you should conduct further analysis into DAN here.
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Does DAN produce enough cash relative to debt?
DAN has built up its total debt levels in the last twelve months, from US$1.9b to US$2.0b , which comprises of short- and long-term debt. With this growth in debt, DAN’s cash and short-term investments stands at US$376m for investing into the business. On top of this, DAN has produced US$487m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 25%, signalling that DAN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DAN’s case, it is able to generate 0.25x cash from its debt capital.
Can DAN meet its short-term obligations with the cash in hand?
With current liabilities at US$1.8b, it seems that the business has been able to meet these obligations given the level of current assets of US$2.9b, with a current ratio of 1.63x. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does DAN face the risk of succumbing to its debt-load?
DAN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In DAN’s case, the ratio of 7.14x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DAN’s high interest coverage is seen as responsible and safe practice.
Next Steps:
DAN’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. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure DAN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Dana to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DAN’s future growth? Take a look at our free research report of analyst consensus for DAN’s outlook.
Valuation: What is DAN 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 DAN 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 editorial-team@simplywallst.com.
