There are a number of reasons that attract investors towards large-cap companies such as DexCom Inc (NASDAQ:DXCM), with a market cap of US$11b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at DexCom’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DXCM here.
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How does DXCM’s operating cash flow stack up against its debt?
DXCM’s debt level has been constant at around US$346m over the previous year – this includes long-term debt. At this constant level of debt, DXCM’s cash and short-term investments stands at US$669m , ready to deploy into the business. Additionally, DXCM has produced US$131m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 38%, meaning that DXCM’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 DXCM’s case, it is able to generate 0.38x cash from its debt capital.
Can DXCM meet its short-term obligations with the cash in hand?
Looking at DXCM’s US$194m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.71x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can DXCM service its debt comfortably?
DXCM is a relatively highly levered company with a debt-to-equity of 62%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies.
Next Steps:
DXCM’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. Since there is also no concerns around DXCM’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure DXCM has company-specific issues impacting its capital structure decisions. I suggest you continue to research DexCom to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DXCM’s future growth? Take a look at our free research report of analyst consensus for DXCM’s outlook.
- Valuation: What is DXCM 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 DXCM 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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.