3M Company (NYSE:MMM), a large-cap worth US$122.85b, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to extending previous success is in the health of the company’s financials. Today we will look at 3M’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 MMM here.
How much cash does MMM generate through its operations?
MMM has built up its total debt levels in the last twelve months, from US$11.31b to US$14.54b , which comprises of short- and long-term debt. With this increase in debt, MMM currently has US$3.19b remaining in cash and short-term investments for investing into the business. Moreover, MMM has produced cash from operations of US$5.65b in the last twelve months, resulting in an operating cash to total debt ratio of 38.9%, signalling that MMM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MMM’s case, it is able to generate 0.39x cash from its debt capital.
Does MMM’s liquid assets cover its short-term commitments?
With current liabilities at US$8.90b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.56x. For Industrials companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can MMM service its debt comfortably?
Since equity is smaller than total debt levels, 3M is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether MMM is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In MMM's case, the ratio of 21.2x suggests that interest is comfortably covered. Large-cap investments like MMM are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although MMM’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. This is only a rough assessment of financial health, and I'm sure MMM has company-specific issues impacting its capital structure decisions. You should continue to research 3M to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MMM’s future growth? Take a look at our free research report of analyst consensus for MMM’s outlook.
- Valuation: What is MMM 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 MMM 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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