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Is Dollar General Corporation’s (NYSE:DG) Balance Sheet A Threat To Its Future?

The size of Dollar General Corporation (NYSE:DG), a US$31b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, its financial health remains the key to continued success. I will provide an overview of Dollar General’s financial liquidity and leverage to give you an idea of Dollar General’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DG here.

Check out our latest analysis for Dollar General

How does DG’s operating cash flow stack up against its debt?

DG has shrunken its total debt levels in the last twelve months, from US$3.1b to US$2.8b – this includes both the current and long-term debt. With this debt repayment, DG’s cash and short-term investments stands at US$265m , ready to deploy into the business. Moreover, DG has generated US$2.1b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 76%, meaning that DG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DG’s case, it is able to generate 0.76x cash from its debt capital.

Can DG pay its short-term liabilities?

With current liabilities at US$2.9b, the company has been able to meet these obligations given the level of current assets of US$4.5b, with a current ratio of 1.55x. For Multiline Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

NYSE:DG Historical Debt November 15th 18
NYSE:DG Historical Debt November 15th 18

Can DG service its debt comfortably?

With a debt-to-equity ratio of 44%, DG can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of DG’s debt levels can be assessed by comparing the company’s interest payments to earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In DG’s case, the ratio of 21.16x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes DG and other large-cap investments thought to be safe.

Next Steps:

Although DG’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how DG has been performing in the past. You should continue to research Dollar General to get a better picture of the large-cap by looking at:

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

  2. Valuation: What is DG 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 DG 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.