Stock Analysis

Does Raytheon Technologies (NYSE:RTX) Have A Healthy Balance Sheet?

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NYSE:RTX
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Raytheon Technologies Corporation (NYSE:RTX) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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How Much Debt Does Raytheon Technologies Carry?

The chart below, which you can click on for greater detail, shows that Raytheon Technologies had US$31.4b in debt in June 2022; about the same as the year before. However, it does have US$4.77b in cash offsetting this, leading to net debt of about US$26.6b.

debt-equity-history-analysis
NYSE:RTX Debt to Equity History September 1st 2022

How Strong Is Raytheon Technologies' Balance Sheet?

We can see from the most recent balance sheet that Raytheon Technologies had liabilities of US$37.8b falling due within a year, and liabilities of US$49.2b due beyond that. On the other hand, it had cash of US$4.77b and US$22.2b worth of receivables due within a year. So it has liabilities totalling US$60.0b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Raytheon Technologies has a huge market capitalization of US$132.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Raytheon Technologies has net debt worth 2.4 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.5 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. Importantly, Raytheon Technologies grew its EBIT by 87% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Raytheon Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Raytheon Technologies produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Raytheon Technologies's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. When we consider the range of factors above, it looks like Raytheon Technologies is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Raytheon Technologies that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

What are the risks and opportunities for Raytheon Technologies?

Raytheon Technologies Corporation, an aerospace and defense company, provides systems and services for the commercial, military, and government customers worldwide.

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Rewards

  • Trading at 31% below our estimate of its fair value

  • Earnings are forecast to grow 14.33% per year

  • Earnings grew by 33.4% over the past year

Risks

No risks detected for RTX from our risks checks.

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About NYSE:RTX

Raytheon Technologies

Raytheon Technologies Corporation, an aerospace and defense company, provides systems and services for the commercial, military, and government customers worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth2
Past Performance4
Financial Health4
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Proven track record with adequate balance sheet.