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Is Baker Hughes a GE company (NYSE:BHGE) As Strong As Its Balance Sheet Indicates?

Baker Hughes a GE company (NYSE:BHGE), a large-cap worth US$26b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for BHGE to determine is solvency and liquidity and whether the stock is a sound investment.

View our latest analysis for Baker Hughes a GE

How does BHGE’s operating cash flow stack up against its debt?

BHGE has built up its total debt levels in the last twelve months, from US$4.9b to US$7.3b , which comprises of short- and long-term debt. With this rise in debt, BHGE currently has US$4.8b remaining in cash and short-term investments , ready to deploy into the business. Additionally, BHGE has produced cash from operations of US$459m during the same period of time, leading to an operating cash to total debt ratio of 6.3%, indicating that BHGE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BHGE’s case, it is able to generate 0.063x cash from its debt capital.

Can BHGE meet its short-term obligations with the cash in hand?

With current liabilities at US$8.5b, it seems that the business has been able to meet these commitments with a current assets level of US$16b, leading to a 1.91x current account ratio. For Energy Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:BHGE Historical Debt November 16th 18

Can BHGE service its debt comfortably?

With debt at 20% of equity, BHGE may be thought of as appropriately levered. This range is considered safe as BHGE is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether BHGE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For BHGE, the ratio of 5.08x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as BHGE is a safe investment.

Next Steps:

BHGE’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure BHGE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Baker Hughes a GE to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BHGE’s future growth? Take a look at our free research report of analyst consensus for BHGE’s outlook.
  2. Valuation: What is BHGE 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 BHGE 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.