Yahoo Finance Is DFS Furniture plc (LON:DFS) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like DFS Furniture plc (LON:DFS), with a market cap of UK£444m. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into DFS here.
Does DFS produce enough cash relative to debt?
DFS’s debt levels have fallen from UK£202m to UK£188m over the last 12 months , which comprises of short- and long-term debt. With this debt payback, DFS currently has UK£23m remaining in cash and short-term investments , ready to deploy into the business. Moreover, DFS has generated cash from operations of UK£67m in the last twelve months, resulting in an operating cash to total debt ratio of 35%, meaning that DFS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DFS’s case, it is able to generate 0.35x cash from its debt capital.
Does DFS’s liquid assets cover its short-term commitments?
With current liabilities at UK£245m, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£114m, leading to a current ratio of 0.47x.
Is DFS’s debt level acceptable?
DFS is a relatively highly levered company with a debt-to-equity of 81%. 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 DFS’s case, the ratio of 8x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as DFS’s high interest coverage is seen as responsible and safe practice.
Next Steps:
DFS’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for DFS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research DFS Furniture to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DFS’s future growth? Take a look at our free research report of analyst consensus for DFS’s outlook.
Valuation: What is DFS 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 DFS 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.
