With a market capitalization of US$24b, Cummins Inc. (NYSE:CMI) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Using the most recent data for CMI, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
How much cash does CMI generate through its operations?
CMI’s debt levels surged from US$2.0b to US$2.5b over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$1.5b for investing into the business. On top of this, CMI has generated cash from operations of US$2.4b in the last twelve months, resulting in an operating cash to total debt ratio of 96%, meaning that CMI’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CMI’s case, it is able to generate 0.96x cash from its debt capital.
Does CMI’s liquid assets cover its short-term commitments?
Looking at CMI’s US$6.4b in current 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 1.54x. Generally, for Machinery 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 CMI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 30%, CMI’s debt level may be seen as prudent. CMI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if CMI’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CMI’s case, the ratio of 32.49x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CMI and other large-cap investments thought to be safe.
CMI’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure CMI has company-specific issues impacting its capital structure decisions. You should continue to research Cummins to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CMI’s future growth? Take a look at our free research report of analyst consensus for CMI’s outlook.
- Valuation: What is CMI 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 CMI 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.
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