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Is ABB Ltd (VTX:ABBN) A Financially Sound Company?

Grace Strickland

The size of ABB Ltd (VTX:ABBN), a CHF48.41b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. Today we will look at ABB’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ABBN here.

See our latest analysis for ABB

Does ABBN produce enough cash relative to debt?

Over the past year, ABBN has ramped up its debt from US$7.83b to US$10.45b , which comprises of short- and long-term debt. With this growth in debt, ABBN currently has US$4.08b remaining in cash and short-term investments for investing into the business. Moreover, ABBN has produced cash from operations of US$3.32b during the same period of time, leading to an operating cash to total debt ratio of 31.7%, indicating that ABBN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ABBN’s case, it is able to generate 0.32x cash from its debt capital.

Can ABBN pay its short-term liabilities?

With current liabilities at US$19.39b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.15x. For Electrical companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SWX:ABBN Historical Debt September 13th 18

Is ABBN’s debt level acceptable?

With debt reaching 73.7% of equity, ABBN 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. We can test if ABBN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In ABBN’s case, the ratio of 15.29x suggests that interest is amply covered. Large-cap investments like ABBN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

Although ABBN’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. Since there is also no concerns around ABBN’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure ABBN has company-specific issues impacting its capital structure decisions. I recommend you continue to research ABB to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ABBN’s future growth? Take a look at our free research report of analyst consensus for ABBN’s outlook.
  2. Valuation: What is ABBN 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 ABBN is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.