Does Dillard's Inc's (NYSE:DDS) Debt Level Pose A Problem?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Dillard's Inc (NYSE:DDS), with a market cap of US$2.61b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. DDS’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into DDS here. Check out our latest analysis for Dillard's

Does DDS produce enough cash relative to debt?

Over the past year, DDS has reduced its debt from US$820.58m to US$730.34m – this includes both the current and long-term debt. With this debt repayment, DDS currently has US$187.03m remaining in cash and short-term investments , ready to deploy into the business. Additionally, DDS has produced cash from operations of US$274.29m over the same time period, leading to an operating cash to total debt ratio of 37.56%, indicating that DDS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DDS’s case, it is able to generate 0.38x cash from its debt capital.

Can DDS pay its short-term liabilities?

With current liabilities at US$1.04b, the company has been able to meet these commitments with a current assets level of US$1.73b, leading to a 1.66x current account ratio. Generally, for Multiline Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can DDS service its debt comfortably?

With debt reaching 43.41% of equity, DDS may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether DDS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DDS's, case, the ratio of 4.6x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DDS’s high interest coverage is seen as responsible and safe practice.

Next Steps:

DDS’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 DDS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DDS's financial health. Other important fundamentals need to be considered alongside. You should continue to research Dillard's to get a more holistic view of the mid-cap by looking at:

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

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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.