Investors pursuing a solid, dependable stock investment can often be led to Rockwell Automation Inc (NYSE:ROK), a large-cap worth US$21.39b. 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. Today we will look at Rockwell Automation’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ROK here.
How does ROK’s operating cash flow stack up against its debt?
ROK’s debt levels have fallen from US$1.84b to US$1.23b over the last 12 months , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$1.49b , ready to deploy into the business. Additionally, ROK has generated US$1.04b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 85.03%, indicating that ROK’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 ROK’s case, it is able to generate 0.85x cash from its debt capital.
Does ROK’s liquid assets cover its short-term commitments?
With current liabilities at US$1.75b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.93x. Usually, for Electrical companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is ROK’s debt level acceptable?
With debt reaching 85.02% of equity, ROK may be thought of as relatively highly levered. 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In ROK’s case, the ratio of 22.37x 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 ROK are considered a risk-averse investment.
ROK’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 ROK’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ROK’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Rockwell Automation to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ROK’s future growth? Take a look at our free research report of analyst consensus for ROK’s outlook.
- Valuation: What is ROK 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 ROK 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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