Yahoo Finance Downer EDI Limited (ASX:DOW): Time For A Financial Health Check
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$3.7b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at DOW’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DOW here.
View our latest analysis for Downer EDI
How much cash does DOW generate through its operations?
Over the past year, DOW has ramped up its debt from AU$1.5b to AU$1.5b – this includes long-term debt. With this increase in debt, DOW’s cash and short-term investments stands at AU$616m , ready to deploy into the business. Additionally, DOW has generated cash from operations of AU$583m during the same period of time, leading to an operating cash to total debt ratio of 38%, indicating that DOW’s debt is appropriately covered by operating cash. 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 0.38x cash from its debt capital.
Can DOW meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$2.9b, the company has been able to meet these commitments with a current assets level of AU$3.1b, leading to a 1.09x current account ratio. For Commercial Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can DOW service its debt comfortably?
DOW is a relatively highly levered company with a debt-to-equity of 48%. 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 DOW’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 DOW, the ratio of 4.78x 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. Since there is also no concerns around DOW’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for DOW’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Downer EDI to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for DOW’s future growth? Take a look at our free research report of analyst consensus for DOW’s outlook.
Valuation: What is DOW worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DOW is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
