Stock Analysis

    Are Diamond Offshore Drilling Inc's (NYSE:DO) Interest Costs Too High?

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    Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Diamond Offshore Drilling Inc (NYSE:DO), with a market cap of US$2.07B, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. DO’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into DO here. Check out our latest analysis for Diamond Offshore Drilling

    How does DO’s operating cash flow stack up against its debt?

    DO has shrunken its total debt levels in the last twelve months, from US$2.09B to US$1.97B , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$376.04M for investing into the business. Additionally, DO has produced cash from operations of US$493.81M during the same period of time, leading to an operating cash to total debt ratio of 25.04%, meaning that DO’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DO’s case, it is able to generate 0.25x cash from its debt capital.

    Can DO meet its short-term obligations with the cash in hand?

    Looking at DO’s most recent US$223.29M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$886.65M, leading to a 3.97x current account ratio. Though, a ratio greater than 3x may be considered as too high, as DO could be holding too much capital in a low-return investment environment.

    NYSE:DO Historical Debt Apr 6th 18
    NYSE:DO Historical Debt Apr 6th 18

    Can DO service its debt comfortably?

    With a debt-to-equity ratio of 52.25%, DO 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 DO’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 DO, the ratio of 2.04x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

    Next Steps:

    DO’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. This is only a rough assessment of financial health, and I'm sure DO has company-specific issues impacting its capital structure decisions. You should continue to research Diamond Offshore Drilling to get a better picture of the mid-cap by looking at:

    1. Future Outlook: What are well-informed industry analysts predicting for DO’s future growth? Take a look at our free research report of analyst consensus for DO’s outlook.
    2. Valuation: What is DO 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 DO is currently mispriced by the market.
    3. 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.

    Valuation is complex, but we're helping make it simple.

    Find out whether is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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    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.