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Honeywell International Inc. (NYSE:HON), a large-cap worth US$121b, comes to mind for investors seeking a strong and reliable stock investment. 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. Let’s take a look at Honeywell International’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HON here.
View our latest analysis for Honeywell International
Does HON Produce Much Cash Relative To Its Debt?
HON's debt levels have fallen from US$18b to US$17b over the last 12 months , which includes long-term debt. With this reduction in debt, HON's cash and short-term investments stands at US$11b to keep the business going. Moreover, HON has produced cash from operations of US$6.4b in the last twelve months, resulting in an operating cash to total debt ratio of 38%, meaning that HON’s current level of operating cash is high enough to cover debt.
Does HON’s liquid assets cover its short-term commitments?
With current liabilities at US$20b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.24x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Industrials companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is HON’s debt level acceptable?
HON is a relatively highly levered company with a debt-to-equity of 89%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if HON’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For HON, the ratio of 57.07x 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 HON are considered a risk-averse investment.
Next Steps:
HON’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. Since there is also no concerns around HON's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how HON has been performing in the past. I recommend you continue to research Honeywell International to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HON’s future growth? Take a look at our free research report of analyst consensus for HON’s outlook.
- Valuation: What is HON 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 HON 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.