Is Leidos Holdings, Inc. (NYSE:LDOS) A Financially Sound Company?
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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Leidos Holdings, Inc. (NYSE:LDOS) 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 Leidos Holdings’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 LDOS here.
View our latest analysis for Leidos Holdings
LDOS’s Debt (And Cash Flows)
LDOS's debt levels surged from US$3.1b to US$3.5b over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$536m to keep the business going. Additionally, LDOS has generated US$1.0b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 29%, meaning that LDOS’s debt is appropriately covered by operating cash.
Can LDOS meet its short-term obligations with the cash in hand?
With current liabilities at US$2.3b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. The current ratio is calculated by dividing current assets by current liabilities. For IT companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does LDOS face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 93%, LDOS can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether LDOS is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For LDOS, the ratio of 5.54x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as LDOS is a safe investment.
Next Steps:
LDOS’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. Since there is also no concerns around LDOS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for LDOS's financial health. Other important fundamentals need to be considered alongside. You should continue to research Leidos Holdings to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LDOS’s future growth? Take a look at our free research report of analyst consensus for LDOS’s outlook.
Valuation: What is LDOS 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 LDOS 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 editorial-team@simplywallst.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.
