Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Harris Corporation (NYSE:HRS) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to their continued success lies in its financial health. This article will examine Harris’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HRS here.
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HRS’s Debt (And Cash Flows)
HRS’s debt levels have fallen from US$4.2b to US$3.5b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$334m , ready to be used for running the business. On top of this, HRS has produced cash from operations of US$1.4b during the same period of time, leading to an operating cash to total debt ratio of 39%, meaning that HRS’s current level of operating cash is high enough to cover debt.
Can HRS pay its short-term liabilities?
Looking at HRS’s US$1.6b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$2.3b, with a current ratio of 1.42x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does HRS face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 98%, HRS can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. By measuring how many times HRS’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. 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. For HRS, the ratio of 7.57x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as HRS is a safe investment.
Although HRS’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. I admit this is a fairly basic analysis for HRS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Harris to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HRS’s future growth? Take a look at our free research report of analyst consensus for HRS’s outlook.
- Valuation: What is HRS 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 HRS 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 firstname.lastname@example.org. 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.