Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Koninklijke DSM N.V. (AMS:DSM). With a market valuation of €17b, DSM is a safe haven in times of market uncertainty due to its strong balance sheet. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for DSM to determine is solvency and liquidity and whether the stock is a sound investment.
DSM’s Debt (And Cash Flows)
Over the past year, DSM has maintained its debt levels at around €2.7b which accounts for long term debt. At this stable level of debt, DSM currently has €2.6b remaining in cash and short-term investments to keep the business going. On top of this, DSM has produced €1.4b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 52%, signalling that DSM’s operating cash is sufficient to cover its debt.
Does DSM’s liquid assets cover its short-term commitments?
At the current liabilities level of €2.6b, it appears that the company has been able to meet these obligations given the level of current assets of €6.3b, with a current ratio of 2.45x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does DSM face the risk of succumbing to its debt-load?
With debt at 34% of equity, DSM may be thought of as appropriately levered. This range is considered safe as DSM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether DSM is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In DSM’s case, the ratio of 14.42x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like DSM are considered a risk-averse investment.
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. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. 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 more holistic view 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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