U.S. Markets open in 4 hrs 36 mins

Does Trimble Inc.'s (NASDAQ:TRMB) Debt Level Pose A Problem?

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!

Trimble Inc. (NASDAQ:TRMB), a large-cap worth US$11b, 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. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Trimble’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TRMB here.

Check out our latest analysis for Trimble

TRMB’s Debt (And Cash Flows)

TRMB has built up its total debt levels in the last twelve months, from US$1.1b to US$2.0b – this includes long-term debt. With this increase in debt, TRMB currently has US$217m remaining in cash and short-term investments , ready to be used for running the business. Additionally, TRMB has generated US$551m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 27%, meaning that TRMB’s debt is appropriately covered by operating cash.

Does TRMB’s liquid assets cover its short-term commitments?

Looking at TRMB’s US$1.1b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.05x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electronic companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:TRMB Historical Debt, May 14th 2019

Is TRMB’s debt level acceptable?

With a debt-to-equity ratio of 74%, TRMB 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. By measuring how many times TRMB’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In TRMB's case, the ratio of 4.57x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes TRMB and other large-cap investments thought to be safe.

Next Steps:

TRMB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around TRMB's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure TRMB has company-specific issues impacting its capital structure decisions. I suggest you continue to research Trimble to get a better picture of the large-cap by looking at:

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