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Baxter International Inc. (NYSE:BAX), a large-cap worth US$40b, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, its financial health remains the key to continued success. Today we will look at Baxter International’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 BAX here.
Does BAX Produce Much Cash Relative To Its Debt?
Over the past year, BAX has ramped up its debt from US$3.6b to US$4.8b – this includes long-term debt. With this rise in debt, BAX's cash and short-term investments stands at US$1.9b , ready to be used for running the business. Moreover, BAX has produced cash from operations of US$1.8b during the same period of time, leading to an operating cash to total debt ratio of 37%, meaning that BAX’s debt is appropriately covered by operating cash.
Can BAX meet its short-term obligations with the cash in hand?
With current liabilities at US$3.3b, it appears that the company has been able to meet these commitments with a current assets level of US$6.1b, leading to a 1.83x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Medical Equipment 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.
Can BAX service its debt comfortably?
With a debt-to-equity ratio of 56%, BAX 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 BAX’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For BAX, the ratio of 35.55x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like BAX are considered a risk-averse investment.
Although BAX’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 BAX'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 BAX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Baxter International to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BAX’s future growth? Take a look at our free research report of analyst consensus for BAX’s outlook.
- Valuation: What is BAX 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 BAX 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.
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 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.