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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Downer EDI Limited (ASX:DOW), with a market capitalization of AU$4.29B, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at DOW’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 Amazon’s financial health, so you should conduct further analysis into DOW here. View our latest analysis for Downer EDI
Does DOW generate enough cash through operations?
DOW’s debt levels surged from AU$652.10M to AU$1.45B over the last 12 months – this includes both the current and long-term debt. With this increase in debt, DOW’s cash and short-term investments stands at AU$854.40M , ready to deploy into the business. Additionally, DOW has generated cash from operations of AU$441.60M in the last twelve months, leading to an operating cash to total debt ratio of 30.39%, signalling that DOW’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DOW’s case, it is able to generate 0.3x cash from its debt capital.
Can DOW meet its short-term obligations with the cash in hand?
Looking at DOW’s most recent AU$3.09B liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.96x, which is below the prudent industry ratio of 3x.
Does DOW face the risk of succumbing to its debt-load?
DOW is a relatively highly levered company with a debt-to-equity of 47.36%. 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 DOW 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 DOW’s, case, the ratio of 6.19x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DOW ample headroom to grow its debt facilities.
Next Steps:
DOW’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. However, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven’t considered other factors such as how DOW has been performing in the past. I suggest you continue to research Downer EDI to get a more holistic view of the stock by looking at: