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Ingersoll-Rand Plc (NYSE:IR), a large-cap worth US$30b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Ingersoll-Rand’s financial liquidity and leverage to give you an idea of Ingersoll-Rand’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into IR here.
Does IR Produce Much Cash Relative To Its Debt?
Over the past year, IR has ramped up its debt from US$4.4b to US$6.1b , which accounts for long term debt. With this increase in debt, IR currently has US$1.9b remaining in cash and short-term investments to keep the business going. Additionally, IR has produced US$1.4b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 23%, indicating that IR’s operating cash is sufficient to cover its debt.
Does IR’s liquid assets cover its short-term commitments?
At the current liabilities level of US$4.5b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery 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.
Does IR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 81%, IR can be considered as an above-average leveraged 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. 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 test if IR’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In IR's case, the ratio of 10.33x suggests that interest is comfortably covered. Large-cap investments like IR are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
IR’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure IR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ingersoll-Rand to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IR’s future growth? Take a look at our free research report of analyst consensus for IR’s outlook.
- Valuation: What is IR 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 IR 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.