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Is DuluxGroup Limited’s (ASX:DLX) Balance Sheet Strong Enough To Weather A Storm?

Stocks with market capitalization between $2B and $10B, such as DuluxGroup Limited (ASX:DLX) with a size of AU$2.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at DLX’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DLX here.

Check out our latest analysis for DuluxGroup

Does DLX produce enough cash relative to debt?

DLX’s debt levels surged from AU$432m to AU$462m over the last 12 months , which is made up of current and long term debt. With this growth in debt, DLX currently has AU$53m remaining in cash and short-term investments , ready to deploy into the business. Additionally, DLX has generated AU$153m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 33%, meaning that DLX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DLX’s case, it is able to generate 0.33x cash from its debt capital.

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

With current liabilities at AU$384m, it seems that the business has been able to meet these commitments with a current assets level of AU$586m, leading to a 1.52x current account ratio. For Chemicals 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.

ASX:DLX Historical Debt November 14th 18
ASX:DLX Historical Debt November 14th 18

Is DLX’s debt level acceptable?

With total debt exceeding equities, DLX is considered a highly levered company. 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 DLX 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 DLX’s, case, the ratio of 14.08x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DLX’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although DLX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around DLX’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure DLX has company-specific issues impacting its capital structure decisions. I suggest you continue to research DuluxGroup to get a more holistic view of the mid-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for DLX’s future growth? Take a look at our free research report of analyst consensus for DLX’s outlook.

  2. Valuation: What is DLX 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 DLX is currently mispriced by the market.

  3. 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.