Investors pursuing a solid, dependable stock investment can often be led to Stanley Black & Decker, Inc. (NYSE:SWK), a large-cap worth US$18b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. I will provide an overview of Stanley Black & Decker’s financial liquidity and leverage to give you an idea of Stanley Black & Decker’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SWK here.
How does SWK’s operating cash flow stack up against its debt?
Over the past year, SWK has ramped up its debt from US$4.5b to US$5.2b , which includes long-term debt. With this rise in debt, SWK currently has US$370m remaining in cash and short-term investments , ready to deploy into the business. Moreover, SWK has produced cash from operations of US$1.5b in the last twelve months, resulting in an operating cash to total debt ratio of 29%, indicating that SWK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SWK’s case, it is able to generate 0.29x cash from its debt capital.
Does SWK’s liquid assets cover its short-term commitments?
At the current liabilities level of US$6.1b, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$5.6b, with a current ratio of 0.92x.
Does SWK face the risk of succumbing to its debt-load?
SWK is a relatively highly levered company with a debt-to-equity of 65%. 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if SWK’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For SWK, the ratio of 8.59x 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 SWK is a safe investment.
Although SWK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how SWK has been performing in the past. You should continue to research Stanley Black & Decker to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWK’s future growth? Take a look at our free research report of analyst consensus for SWK’s outlook.
- Valuation: What is SWK 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 SWK 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.