The size of Johnson Controls International plc (NYSE:JCI), a US$31.79B large-cap, often attracts investors seeking a reliable investment in the stock market. 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. But, the key to extending previous success is in the health of the company’s financials. This article will examine Johnson Controls International’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 JCI here. See our latest analysis for Johnson Controls International
How much cash does JCI generate through its operations?
JCI has built up its total debt levels in the last twelve months, from US$12.76B to US$13.57B , which comprises of short- and long-term debt. With this growth in debt, JCI’s cash and short-term investments stands at US$321.00M for investing into the business. Moreover, JCI has generated cash from operations of US$12.00M in the last twelve months, leading to an operating cash to total debt ratio of 0.088%, signalling that JCI’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JCI’s case, it is able to generate 0.00088x cash from its debt capital.
Can JCI meet its short-term obligations with the cash in hand?
Looking at JCI’s most recent US$11.85B liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. For Building companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can JCI service its debt comfortably?
JCI is a relatively highly levered company with a debt-to-equity of 57.54%. 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. 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 JCI’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JCI’s case, the ratio of 7.75x suggests that interest is appropriately covered. Large-cap investments like JCI are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
JCI’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for JCI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Johnson Controls International to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JCI’s future growth? Take a look at our free research report of analyst consensus for JCI’s outlook.
- Valuation: What is JCI 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 JCI 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 pass 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.