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PACCAR Inc (NASDAQ:PCAR), a large-cap worth US$23b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of PACCAR’s financial liquidity and leverage to give you an idea of PACCAR’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 PCAR here.
PCAR’s Debt (And Cash Flows)
PCAR's debt levels surged from US$9.2b to US$10b over the last 12 months – this includes long-term debt. With this growth in debt, PCAR currently has US$3.8b remaining in cash and short-term investments , ready to be used for running the business. Moreover, PCAR has produced US$2.8b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 28%, meaning that PCAR’s current level of operating cash is high enough to cover debt.
Can PCAR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$4.3b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.39x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can PCAR service its debt comfortably?
With total debt exceeding equities, PACCAR is considered a highly levered company. 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.
Although PCAR’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. Since there is also no concerns around PCAR's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how PCAR has been performing in the past. I suggest you continue to research PACCAR to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PCAR’s future growth? Take a look at our free research report of analyst consensus for PCAR’s outlook.
- Valuation: What is PCAR 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 PCAR 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.