With a market capitalization of €15.50b, Koninklijke DSM NV (AMS:DSM) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for DSM, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Check out our latest analysis for Koninklijke DSM
Does DSM produce enough cash relative to debt?
DSM's debt levels have fallen from €3.39b to €2.65b over the last 12 months – this includes both the current and long-term debt. With this debt repayment, DSM currently has €1.82b remaining in cash and short-term investments , ready to deploy into the business. Additionally, DSM has generated €1.17b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 44.08%, meaning that DSM’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DSM’s case, it is able to generate 0.44x cash from its debt capital.
Can DSM meet its short-term obligations with the cash in hand?
At the current liabilities level of €2.38b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €5.98b, with a current ratio of 2.51x. Usually, for Chemicals companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can DSM service its debt comfortably?
DSM’s level of debt is appropriate relative to its total equity, at 35.85%. This range is considered safe as DSM is not taking on too much debt obligation, which may be constraining for future growth. We can test if DSM’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In DSM's case, the ratio of 12.35x suggests that interest is comfortably covered. Large-cap investments like DSM are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
DSM’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for DSM's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Koninklijke DSM to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DSM’s future growth? Take a look at our free research report of analyst consensus for DSM’s outlook.
- Valuation: What is DSM 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 DSM 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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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.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.