Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Dixons Carphone plc (LON:DC.), with a market cap of UK£1.9b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. DC.’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. Don’t forget that this is a general and concentrated examination of Dixons Carphone’s financial health, so you should conduct further analysis into DC. here.
View our latest analysis for Dixons Carphone
How much cash does DC. generate through its operations?
DC. has sustained its debt level by about UK£477m over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, DC.’s cash and short-term investments stands at UK£228m , ready to deploy into the business. On top of this, DC. has generated UK£312m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 65%, signalling that DC.’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DC.’s case, it is able to generate 0.65x cash from its debt capital.
Can DC. pay its short-term liabilities?
At the current liabilities level of UK£2.7b liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x.
Is DC.’s debt level acceptable?
With debt at 15% of equity, DC. may be thought of as appropriately levered. DC. is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether DC. 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 DC.’s, case, the ratio of 11.81x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DC.’s high interest coverage is seen as responsible and safe practice.
Next Steps:
DC. has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. I admit this is a fairly basic analysis for DC.’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Dixons Carphone to get a more holistic view of the stock by looking at: