Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as CNH Industrial NV. (NYSE:CNHI) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. This article will examine CNH Industrial’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CNHI here. See our latest analysis for CNH Industrial
Does CNHI produce enough cash relative to debt?
CNHI’s debt level has been constant at around US$25.92B over the previous year comprising of short- and long-term debt. At this stable level of debt, CNHI’s cash and short-term investments stands at US$4.91B , ready to deploy into the business. Moreover, CNHI has produced cash from operations of US$2.02B in the last twelve months, leading to an operating cash to total debt ratio of 7.78%, meaning that CNHI’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CNHI’s case, it is able to generate 0.078x cash from its debt capital.
Can CNHI meet its short-term obligations with the cash in hand?
With current liabilities at US$21.85B, it seems that the business has been able to meet these commitments with a current assets level of US$32.90B, leading to a 1.51x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CNHI face the risk of succumbing to its debt-load?
Considering CNH Industrial’s total debt outweighs its equity, the company is deemed highly levered. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether CNHI is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In CNHI’s case, the ratio of 3.45x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CNHI and other large-cap investments thought to be safe.
CNHI’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CNHI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research CNH Industrial to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CNHI’s future growth? Take a look at our free research report of analyst consensus for CNHI’s outlook.
- Valuation: What is CNHI 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 CNHI 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.