Yahoo Finance What Investors Should Know About DuluxGroup Limited’s (ASX:DLX) Financial Strength
While small-cap stocks, such as DuluxGroup Limited (ASX:DLX) with its market cap of AU$2.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into DLX here.
How much cash does DLX generate through its operations?
Over the past year, DLX has ramped up its debt from AU$432m to AU$462m , which comprises of short- and long-term debt. With this increase in debt, DLX currently has AU$53m remaining in cash and short-term investments for investing into the business. Additionally, DLX has produced cash from operations of AU$153m during the same period of time, 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.
Does DLX’s liquid assets cover its short-term commitments?
With current liabilities at AU$384m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.52x. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is DLX’s debt level acceptable?
Since total debt levels have outpaced equities, DLX is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax 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. Keep in mind I haven’t considered other factors such as how DLX has been performing in the past. I suggest you continue to research DuluxGroup to get a more holistic view of the small-cap by looking at:
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.
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.
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.
