Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Dassault Aviation SA (EPA:AM). With a market valuation of €10b, AM is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Today I will analyse the latest financial data for AM to determine is solvency and liquidity and whether the stock is a sound investment.
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AM’s Debt (And Cash Flows)
Over the past year, AM has reduced its debt from €1.1b to €995m , which also accounts for long term debt. With this debt repayment, AM currently has €6.2b remaining in cash and short-term investments , ready to be used for running the business. Moreover, AM has generated cash from operations of €1.3b over the same time period, resulting in an operating cash to total debt ratio of 126%, signalling that AM’s debt is appropriately covered by operating cash.
Does AM’s liquid assets cover its short-term commitments?
Looking at AM’s €12b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. The current ratio is the number you get when you divide current assets by current liabilities. For Aerospace & Defense 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.
Is AM’s debt level acceptable?
With a debt-to-equity ratio of 23%, AM's debt level may be seen as prudent. This range is considered safe as AM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether AM is able to meet its debt obligations by looking at the net interest coverage ratio. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In AM's case, the ratio of 5.77x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like AM are considered a risk-averse investment.
AM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for AM's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Dassault Aviation to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AM’s future growth? Take a look at our free research report of analyst consensus for AM’s outlook.
- Historical Performance: What has AM's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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