U.S. Markets closed

Does Honeywell International Inc.’s (NYSE:HON) Debt Level Pose A Problem?

Simply Wall St

The size of Honeywell International Inc. (NYSE:HON), a US$112b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Honeywell International’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into HON here.

See our latest analysis for Honeywell International

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

HON’s debt levels have fallen from US$18b to US$16b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$11b for investing into the business. On top of this, HON has produced cash from operations of US$6.4b in the last twelve months, leading to an operating cash to total debt ratio of 40%, meaning that HON’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HON’s case, it is able to generate 0.4x cash from its debt capital.

Can HON pay its short-term liabilities?

Looking at HON’s US$19b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$24b, with a current ratio of 1.29x. Generally, for Industrials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:HON Historical Debt, March 7th 2019

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

With debt reaching 88% of equity, HON may be thought of as relatively 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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if HON’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In HON’s case, the ratio of 52.3x suggests that interest is amply covered. Large-cap investments like HON are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

Although HON’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around HON’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how HON has been performing in the past. I recommend you continue to research Honeywell International to get a more holistic view of the large-cap by looking at:

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