Are you worried about DLX debt?, page-3

I think in Dulux's case, a more instructive analysis looks at debt serviceability ratios such as interest cover.

@Clueso,

@Value101 is right: Debt-to-Equity is very much a 1980s-way of evaluating solvency. The reason it is largely irrelevant is because people have come to understand that the value of "Shareholder Equity" is somewhat of an accounting construct, whose composition can differ markedly from one company to the next.

So, it can sometimes be quite an arbitrary figure, having been subjected to all sorts of legacy events, such as asset writedowns, acquistioon activity, capital management and general subjective interpretation of accounting standards. Often, the figure representing Shareholder Equity can be so un-representative of the real physical equity value in a business as to be downright misleading.

On @Value101's recommended measure, namely interest coverage, using EBITDA-to-Interest, DLX's last result (FY2016) show that metric to be a very healthy 11.7x, up from 11.0x in FY2015, and 8.4x in FY2014.

That improvement in the interest coverage over time has occurred despite the company investing aggressively in the business, and at the same time increasing dividends by 30%.

This is testimony to the company's very strong Free Cash Flow generation, with less than 20 cents out of each dollar of Operating Cash Flow needing to be retained for maintenance capex purposes.

Another commonly-used debt measure is Net Debt-to-EBITDA.
In DLX's case this is running at around 1.5x which, for a company with DLX's strong and stable Free Cash Flow, is nothing.

DLX's Free Cash Flows could easily support Net Debt-to-EBITDA in a range of 2.5x to 3.0x.

So, while I certainly like the companies in which I invest to have less - rather than more - debt, some might argue that the DLX balance sheet is under-utilised and can be made to work a bit harder.

This raises a minor concern about the prospect for an acquisition to be made.

Which I hope does not happen, because I can't see much value being created by buying things at the top of the cycle.


Finally, touching on valuation, at an EV/EBITDA multiple of around 12.0x and a P/E multiple close to 20x, the stock is by no means inexpensive, notwithstanding its premium quality attributes.