Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Emerson Electric Co. (NYSE:EMR) a safer option. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, its financial health remains the key to continued success. Today we will look at Emerson Electric’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 EMR here.
How much cash does EMR generate through its operations?
Over the past year, EMR has maintained its debt levels at around US$4.8b – this includes long-term debt. At this current level of debt, EMR currently has US$1.1b remaining in cash and short-term investments for investing into the business. Additionally, EMR has generated US$2.9b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 61%, signalling that EMR’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EMR’s case, it is able to generate 0.61x cash from its debt capital.
Can EMR meet its short-term obligations with the cash in hand?
Looking at EMR’s US$6.2b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.07x. Generally, for Electrical 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 EMR service its debt comfortably?
EMR is a relatively highly levered company with a debt-to-equity of 53%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times EMR’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In EMR’s case, the ratio of 18.28x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as EMR is a safe investment.
EMR’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure EMR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Emerson Electric to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EMR’s future growth? Take a look at our free research report of analyst consensus for EMR’s outlook.
- Valuation: What is EMR 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 EMR 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.