Is Magna International Inc's (NYSE:MGA) Balance Sheet A Threat To Its Future?

By
Simply Wall St
Published
March 30, 2018
NYSE:MGA

There are a number of reasons that attract investors towards large-cap companies such as Magna International Inc (NYSE:MGA), with a market cap of US$19.52B. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to their continued success lies in its financial health. This article will examine Magna International’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MGA here. Check out our latest analysis for Magna International

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

MGA has built up its total debt levels in the last twelve months, from US$3.16B to US$3.56B – this includes both the current and long-term debt. With this growth in debt, MGA's cash and short-term investments stands at US$726.00M for investing into the business. Additionally, MGA has generated US$3.33B in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 93.46%, signalling that MGA’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 MGA’s case, it is able to generate 0.93x cash from its debt capital.

Can MGA meet its short-term obligations with the cash in hand?

Looking at MGA’s most recent US$9.17B liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. Generally, for Auto Components companies, this is a reasonable ratio as there's enough of a cash buffer without holding too capital in low return investments.

NYSE:MGA Historical Debt Mar 30th 18
NYSE:MGA Historical Debt Mar 30th 18

Does MGA face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 30.36%, MGA's debt level may be seen as prudent. MGA is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether MGA is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For MGA, the ratio of 40.67x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like MGA are considered a risk-averse investment.

Next Steps:

MGA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how MGA has been performing in the past. I suggest you continue to research Magna International to get a better picture of the stock by looking at:

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

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Simply Wall St has no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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