U.S. Markets closed

Cummins Inc. (NYSE:CMI): Financial Strength Analysis

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Cummins Inc. (NYSE:CMI), 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 companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Assessing the most recent data for CMI, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.

Check out our latest analysis for Cummins

CMI’s Debt (And Cash Flows)

CMI's debt levels surged from US$2.0b to US$2.5b over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$1.5b to keep the business going. On top of this, CMI has generated cash from operations of US$2.4b in the last twelve months, leading to an operating cash to total debt ratio of 96%, meaning that CMI’s debt is appropriately covered by operating cash.

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

With current liabilities at US$6.4b, the company has been able to meet these obligations given the level of current assets of US$9.8b, with a current ratio of 1.54x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:CMI Historical Debt, May 2nd 2019

Can CMI service its debt comfortably?

With debt at 30% of equity, CMI may be thought of as appropriately levered. CMI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether CMI 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 CMI's case, the ratio of 32.49x 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 CMI is a safe investment.

Next Steps:

CMI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for CMI's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cummins to get a more holistic view of the stock by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.