Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like DCC plc (LSE:DCC), with a market cap of £6.87B, 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. This article will examine DCC’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DCC here. See our latest analysis for DCC
Does DCC generate enough cash through operations?
Over the past year, DCC has maintained its debt levels at around £1,474.8M made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at £1,061.4M for investing into the business. Additionally, DCC has generated £383.3M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 25.99%, indicating that DCC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DCC’s case, it is able to generate 0.26x cash from its debt capital.
Does DCC’s liquid assets cover its short-term commitments?
With current liabilities at £2,126.3M, it appears that the company has been able to meet these obligations given the level of current assets of £2,938.5M, with a current ratio of 1.38x. For Industrials companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is DCC’s debt level acceptable?
Since total debt levels have outpaced equities, DCC is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In DCC’s case, the ratio of 4.89x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DCC ample headroom to grow its debt facilities.
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DCC’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. I admit this is a fairly basic analysis for DCC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research DCC to get a better picture of the mid-cap by looking at: