There are a number of reasons that attract investors towards large-cap companies such as Johnson Controls International plc (NYSE:JCI), with a market cap of US$29b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. I will provide an overview of Johnson Controls International’s financial liquidity and leverage to give you an idea of Johnson Controls International’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into JCI here.
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How much cash does JCI generate through its operations?
Over the past year, JCI has reduced its debt from US$14b to US$11b , which includes long-term debt. With this debt payback, JCI’s cash and short-term investments stands at US$200m , ready to deploy into the business. Additionally, JCI has generated US$2.5b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 23%, meaning that JCI’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 JCI’s case, it is able to generate 0.23x cash from its debt capital.
Can JCI meet its short-term obligations with the cash in hand?
At the current liabilities level of US$11b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.05x. Usually, for Building companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can JCI service its debt comfortably?
With debt reaching 49% of equity, JCI may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In JCI’s case, the ratio of 8.9x 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 JCI is a safe investment.
JCI’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 proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure JCI has company-specific issues impacting its capital structure decisions. I recommend you 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 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.