There are a number of reasons that attract investors towards large-cap companies such as The Boeing Company (NYSE:BA), with a market cap of US$199.51B. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. This article will examine Boeing’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into BA here. See our latest analysis for Boeing
How does BA’s operating cash flow stack up against its debt?
BA has built up its total debt levels in the last twelve months, from US$9.95B to US$11.12B – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$9.99B , ready to deploy into the business. On top of this, BA has produced cash from operations of US$13.34B in the last twelve months, resulting in an operating cash to total debt ratio of 120.03%, signalling that BA’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BA’s case, it is able to generate 1.2x cash from its debt capital.
Can BA pay its short-term liabilities?
With current liabilities at US$56.27B, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. Usually, for Aerospace & Defense companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is BA’s debt level acceptable?
With total debt exceeding equities, Boeing is considered a highly levered company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. 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 BA’s case, the ratio of 60.26x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like BA are considered a risk-averse investment.
BA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure BA has company-specific issues impacting its capital structure decisions. You should continue to research Boeing to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BA’s future growth? Take a look at our free research report of analyst consensus for BA’s outlook.
- Valuation: What is BA 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 BA 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 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.