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There are a number of reasons that attract investors towards large-cap companies such as Harris Corporation (NYSE:HRS), with a market cap of US$22b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the health of the financials determines whether the company continues to succeed. This article will examine Harris’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HRS here.
Does HRS Produce Much Cash Relative To Its Debt?
HRS's debt levels have fallen from US$4.2b to US$3.5b over the last 12 months , which also accounts for long term debt. With this debt payback, HRS's cash and short-term investments stands at US$334m to keep the business going. Additionally, HRS has produced cash from operations of US$1.4b during the same period of time, leading to an operating cash to total debt ratio of 39%, meaning that HRS’s operating cash is sufficient to cover its debt.
Does HRS’s liquid assets cover its short-term commitments?
With current liabilities at US$1.6b, it appears that the company has been able to meet these commitments with a current assets level of US$2.3b, leading to a 1.42x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is HRS’s debt level acceptable?
HRS is a relatively highly levered company with a debt-to-equity of 98%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if HRS’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In HRS's case, the ratio of 7.57x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like HRS are considered a risk-averse investment.
Although HRS’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. Keep in mind I haven't considered other factors such as how HRS has been performing in the past. I suggest you continue to research Harris to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HRS’s future growth? Take a look at our free research report of analyst consensus for HRS’s outlook.
- Valuation: What is HRS 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 HRS 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.