Investors pursuing a solid, dependable stock investment can often be led to Red Hat Inc (NYSE:RHT), a large-cap worth US$23.99b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Red Hat’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RHT here. View out our latest analysis for Red Hat
How much cash does RHT generate through its operations?
RHT has sustained its debt level by about US$749.05m over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$2.10b for investing into the business. Moreover, RHT has generated US$1.01b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 135.03%, signalling that RHT’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RHT’s case, it is able to generate 1.35x cash from its debt capital.
Does RHT’s liquid assets cover its short-term commitments?
Looking at RHT’s most recent US$2.28b liabilities, the company has been able to meet these obligations given the level of current assets of US$2.91b, with a current ratio of 1.28x. Usually, for Software companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can RHT service its debt comfortably?
RHT is a relatively highly levered company with a debt-to-equity of 52.31%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if RHT’s debt levels are sustainable by measuring interest payments against earnings of a company. 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. In RHT’s case, the ratio of 201x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as RHT is a safe investment.
Although RHT’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 RHT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Red Hat to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RHT’s future growth? Take a look at our free research report of analyst consensus for RHT’s outlook.
- Valuation: What is RHT 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 RHT 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.