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The size of Jacobs Engineering Group Inc. (NYSE:JEC), a US$11b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. This article will examine Jacobs Engineering Group’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into JEC here.
JEC’s Debt (And Cash Flows)
JEC's debt levels surged from US$2.5b to US$2.8b over the last 12 months – this includes long-term debt. With this increase in debt, JEC currently has US$675m remaining in cash and short-term investments , ready to be used for running the business. On top of this, JEC has generated US$372m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 13%, indicating that JEC’s debt is not covered by operating cash.
Can JEC pay its short-term liabilities?
With current liabilities at US$3.2b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.52x. The current ratio is calculated by dividing current assets by current liabilities. For Construction companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can JEC service its debt comfortably?
JEC is a relatively highly levered company with a debt-to-equity of 51%. 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 JEC’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. In JEC's case, the ratio of 8.6x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes JEC and other large-cap investments thought to be safe.
JEC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how JEC has been performing in the past. I recommend you continue to research Jacobs Engineering Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JEC’s future growth? Take a look at our free research report of analyst consensus for JEC’s outlook.
- Valuation: What is JEC 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 JEC 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.