Investors are always looking for growth in small-cap stocks like Dillard’s, Inc. (NYSE:DDS), with a market cap of US$1.7b. However, an important fact which most ignore is: how financially healthy is the business? Multiline Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into DDS here.
How does DDS’s operating cash flow stack up against its debt?
DDS has shrunken its total debt levels in the last twelve months, from US$818m to US$760m , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$78m for investing into the business. Additionally, DDS has produced cash from operations of US$288m over the same time period, leading to an operating cash to total debt ratio of 38%, signalling that DDS’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 DDS’s case, it is able to generate 0.38x cash from its debt capital.
Does DDS’s liquid assets cover its short-term commitments?
Looking at DDS’s US$1.5b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.49x. For Multiline Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can DDS service its debt comfortably?
DDS is a relatively highly levered company with a debt-to-equity of 47%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 5.1x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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 suggest you continue to research Dillard’s to get a more holistic view of the small-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.
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 email@example.com.