Stocks with market capitalization between $2B and $10B, such as Dillard’s Inc (NYSE:DDS) with a size of US$2.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at DDS’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Dillard’s’s financial health, so you should conduct further analysis into DDS here.
Does DDS produce enough cash relative to debt?
DDS’s debt level has been constant at around US$803m over the previous year comprising of short- and long-term debt. At this stable level of debt, DDS currently has US$117m remaining in cash and short-term investments , ready to deploy into the business. Moreover, DDS has produced US$237m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 29%, signalling 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 0.29x cash from its debt capital.
Does DDS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.1b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.71x. For Multiline Retail companies, this ratio is within a sensible range 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 a debt-to-equity ratio of 48%, DDS 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 DDS’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 DDS, the ratio of 5.09x 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.
Although DDS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around DDS’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 DDS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Dillard’s to get a more holistic view of the mid-cap by looking at:
- 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.
- 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.
- 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.
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