Stocks with market capitalization between $2B and $10B, such as DS Smith Plc (LSE:SMDS) with a size of £5.36B, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at SMDS’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SMDS here. Check out our latest analysis for DS Smith

Does SMDS generate enough cash through operations?

SMDS has sustained its debt level by about £1,279.0M over the last 12 months made up of current and long term debt. At this constant level of debt, SMDS’s cash and short-term investments stands at £139.0M for investing into the business. On top of this, SMDS has produced cash from operations of £523.0M in the last twelve months, leading to an operating cash to total debt ratio of 40.89%, indicating that SMDS’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 SMDS’s case, it is able to generate 0.41x cash from its debt capital.

Can SMDS meet its short-term obligations with the cash in hand?

At the current liabilities level of £1,650.0M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of £1,336.0M, with a current ratio of 0.81x below the prudent level of 3x.

Can SMDS service its debt comfortably?

SMDS is a relatively highly levered company with a debt-to-equity of 99.01%. 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 SMDS’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 SMDS, the ratio of 9x 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.

Next Steps:

Although SMDS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for SMDS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research DS Smith to get a better picture of the stock by looking at: