Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Sartorius Stedim Biotech SA (EPA:DIM), with a market cap of €8.7b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at DIM’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into DIM here.

See our latest analysis for Sartorius Stedim Biotech

How much cash does DIM generate through its operations?

Over the past year, DIM has ramped up its debt from €180m to €195m , which includes long-term debt. With this growth in debt, DIM’s cash and short-term investments stands at €77m for investing into the business. Moreover, DIM has produced €226m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 116%, indicating that DIM’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 DIM’s case, it is able to generate 1.16x cash from its debt capital.

Does DIM’s liquid assets cover its short-term commitments?

Looking at DIM’s €441m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €596m, leading to a 1.35x current account ratio. Generally, for Life Sciences companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does DIM face the risk of succumbing to its debt-load?

With debt at 20% of equity, DIM may be thought of as appropriately levered. DIM is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if DIM’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 DIM, the ratio of 22.68x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DIM’s high interest coverage is seen as responsible and safe practice.

Next Steps:

DIM’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure DIM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sartorius Stedim Biotech to get a more holistic view of the stock by looking at: