Are Aptiv PLC’s (NYSE:APTV) Interest Costs Too High?
There are a number of reasons that attract investors towards large-cap companies such as Aptiv PLC (NYSE:APTV), with a market cap of $25.16B. 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 health of the financials determines whether the company continues to succeed. This article will examine Aptiv’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into APTV here. Check out our latest analysis for Aptiv
How does APTV’s operating cash flow stack up against its debt?
Over the past year, APTV has maintained its debt levels at around $3,971.0M comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at $838.0M for investing into the business. Additionally, APTV has generated $1,941.0M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 48.88%, signalling that APTV’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 APTV’s case, it is able to generate 0.49x cash from its debt capital.
Can APTV meet its short-term obligations with the cash in hand?
Looking at APTV’s most recent $4,148.0M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $5,419.0M, with a current ratio of 1.31x. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does APTV face the risk of succumbing to its debt-load?
With total debt exceeding equities, Aptiv is considered a highly levered company. 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 put the sustainability of APTV’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In APTV’s case, the ratio of 17.97x 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 APTV is a safe investment.
Next Steps:
Although APTV’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 APTV’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 APTV has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aptiv to get a better picture of the large-cap by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for APTV’s future growth? Take a look at our free research report of analyst consensus for APTV’s outlook.
2. Valuation: What is APTV 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 APTV 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 pass 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.
