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Are Hexcel Corporation's (NYSE:HXL) Interest Costs Too High?

Simply Wall St

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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Hexcel Corporation (NYSE:HXL) with a market-capitalization of US$6.5b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at HXL’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Hexcel’s financial health, so you should conduct further analysis into HXL here.

Check out our latest analysis for Hexcel

Does HXL Produce Much Cash Relative To Its Debt?

Over the past year, HXL has ramped up its debt from US$840m to US$1.2b , which accounts for long term debt. With this growth in debt, HXL currently has US$44m remaining in cash and short-term investments to keep the business going. On top of this, HXL has produced US$405m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 33%, meaning that HXL’s operating cash is sufficient to cover its debt.

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

Looking at HXL’s US$350m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$782m, with a current ratio of 2.24x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:HXL Historical Debt, June 16th 2019

Can HXL service its debt comfortably?

With a debt-to-equity ratio of 85%, HXL can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In HXL's case, the ratio of 9.4x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HXL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although HXL’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 HXL's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HXL's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hexcel to get a better picture of the mid-cap by looking at:

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