Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Dechra Pharmaceuticals PLC (LON:DPH), with a market capitalization of UK£2.5b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at DPH’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 DPH here.
DPH’s Debt (And Cash Flows)
DPH’s debt levels surged from UK£175m to UK£317m over the last 12 months , which includes long-term debt. With this increase in debt, DPH’s cash and short-term investments stands at UK£87m to keep the business going. On top of this, DPH has generated UK£81m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 26%, meaning that DPH’s debt is appropriately covered by operating cash.
Does DPH’s liquid assets cover its short-term commitments?
With current liabilities at UK£104m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.51x. The current ratio is calculated by dividing current assets by current liabilities. For Pharmaceuticals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DPH service its debt comfortably?
With a debt-to-equity ratio of 63%, DPH can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if DPH’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 DPH, the ratio of 3.87x 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.
DPH’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 DPH has been performing in the past. I recommend you continue to research Dechra Pharmaceuticals to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DPH’s future growth? Take a look at our free research report of analyst consensus for DPH’s outlook.
- Valuation: What is DPH 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 DPH 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.
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