Yahoo Finance Dechra Pharmaceuticals plc (LON:DPH): Time For A Financial Health Check
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Dechra Pharmaceuticals plc (LON:DPH) with a market-capitalization of UK£3.19b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at DPH’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. Don’t forget that this is a general and concentrated examination of Dechra Pharmaceuticals’s financial health, so you should conduct further analysis into DPH here.
Check out our latest analysis for Dechra Pharmaceuticals
How much cash does DPH generate through its operations?
DPH’s debt levels have fallen from UK£187.2m to UK£174.5m over the last 12 months , which is made up of current and long term debt. With this debt payback, DPH currently has UK£75.8m remaining in cash and short-term investments , ready to deploy into the business. Additionally, DPH has produced cash from operations of UK£75.0m during the same period of time, resulting in an operating cash to total debt ratio of 43.0%, meaning that DPH’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 DPH’s case, it is able to generate 0.43x cash from its debt capital.
Can DPH meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£70.1m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.97x. Generally, for Pharmaceuticals 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 DPH face the risk of succumbing to its debt-load?
DPH is a relatively highly levered company with a debt-to-equity of 55.4%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if DPH’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 DPH, the ratio of 9.08x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving DPH ample headroom to grow its debt facilities.
Next Steps:
DPH’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 DPH’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 DPH has been performing in the past. I recommend you continue to research Dechra Pharmaceuticals to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for DPH’s future growth? Take a look at our free research report of analyst consensus for DPH’s outlook.
Valuation: What is DPH 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 DPH 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.
