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Investors pursuing a solid, dependable stock investment can often be led to Eaton Corporation plc (NYSE:ETN), a large-cap worth US$32b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Eaton’s financial liquidity and leverage to give you an idea of Eaton’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ETN here.
Does ETN Produce Much Cash Relative To Its Debt?
ETN's debt level has been constant at around US$8.0b over the previous year including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$446m to keep the business going. Additionally, ETN has generated US$2.9b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 36%, signalling that ETN’s debt is appropriately covered by operating cash.
Does ETN’s liquid assets cover its short-term commitments?
With current liabilities at US$5.3b, the company has been able to meet these commitments with a current assets level of US$7.7b, leading to a 1.47x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electrical companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ETN face the risk of succumbing to its debt-load?
With debt reaching 49% of equity, ETN may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of ETN’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For ETN, the ratio of 11.28x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ETN are considered a risk-averse investment.
Although ETN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for ETN's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Eaton to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ETN’s future growth? Take a look at our free research report of analyst consensus for ETN’s outlook.
- Valuation: What is ETN 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 ETN 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 email@example.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.