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What does General Dynamics Corporation's (NYSE:GD) Balance Sheet Tell Us About Its Future?

Simply Wall St

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General Dynamics Corporation (NYSE:GD), a large-cap worth US$49b, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of General Dynamics’s financial liquidity and leverage to give you an idea of General Dynamics’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GD here.

View our latest analysis for General Dynamics

GD’s Debt (And Cash Flows)

GD's debt levels surged from US$6.5b to US$15b over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$673m , ready to be used for running the business. Additionally, GD has produced cash from operations of US$2.8b in the last twelve months, resulting in an operating cash to total debt ratio of 19%, signalling that GD’s operating cash is less than its debt.

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

Looking at GD’s US$15b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$19b, with a current ratio of 1.23x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:GD Historical Debt, June 13th 2019

Does GD face the risk of succumbing to its debt-load?

Since equity is smaller than total debt levels, General Dynamics is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. The sustainability of GD’s debt levels can be assessed by comparing the company’s interest payments to earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In GD's case, the ratio of 10.14x suggests that interest is amply covered. Large-cap investments like GD are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

GD’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 GD's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research General Dynamics to get a better picture of the stock by looking at:

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