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Are Huntington Ingalls Industries, Inc.'s (NYSE:HII) Interest Costs Too High?

Simply Wall St

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Mid-caps stocks, like Huntington Ingalls Industries, Inc. (NYSE:HII) with a market capitalization of US$9.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine HII’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HII here.

See our latest analysis for Huntington Ingalls Industries

HII’s Debt (And Cash Flows)

HII has built up its total debt levels in the last twelve months, from US$1.3b to US$1.7b – this includes long-term debt. With this increase in debt, HII currently has US$51m remaining in cash and short-term investments to keep the business going. Additionally, HII has produced cash from operations of US$805m during the same period of time, leading to an operating cash to total debt ratio of 48%, meaning that HII’s current level of operating cash is high enough to cover debt.

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

At the current liabilities level of US$2.0b, the company may not be able to easily meet these obligations given the level of current assets of US$1.9b, with a current ratio of 0.98x. The current ratio is calculated by dividing current assets by current liabilities.

NYSE:HII Historical Debt, June 18th 2019

Is HII’s debt level acceptable?

HII is a relatively highly levered company with a debt-to-equity of 96%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 HII's case, the ratio of 24.03x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HII’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although HII’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how HII has been performing in the past. I suggest you continue to research Huntington Ingalls Industries to get a better picture of the stock by looking at:

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