What does Textron Inc’s (TXT) Balance Sheet Tell Us Abouts Its Future?
There are a number of reasons that attract investors towards large-cap companies such as Textron Inc (NYSE:TXT), with a market cap of $14.45B. One such reason is its ‘too big to fail’ aura which gives it the appearance of a strong and healthy investment. However, investors may not be aware of the metrics used to measure financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Textron
Does TXT face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. In the case of TXT, the debt-to-equity ratio is 73.62%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether TXT’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. TXT’s profits amply covers interest at 7.54 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving TXT ample headroom to grow its debt facilities.
How does TXT’s operating cash flow stack up against its debt?
A basic way to evaluate TXT’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether TXT has the ability to repay its debt with cash from its business, which is less of a concern for large companies. In the case of TXT, operating cash flow turned out to be 0.29x its debt level over the past twelve months. This is a good sign, as over a quarter of TXT’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Next Steps:
Are you a shareholder? Although TXT’s debt level is towards the higher end of the spectrum, investors shouldn’t panic since its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since TXT’s financial position may change, I encourage examining market expectations for TXT’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. So, I recommend potential investors to assess TXT’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.
