TE Connectivity Ltd. (NYSE:TEL), a large-cap worth US$25b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Assessing the most recent data for TEL, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
How does TEL’s operating cash flow stack up against its debt?
Over the past year, TEL has reduced its debt from US$4.4b to US$4.1b – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$848m for investing into the business. On top of this, TEL has produced US$2.5b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 60%, meaning that TEL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TEL’s case, it is able to generate 0.6x cash from its debt capital.
Can TEL meet its short-term obligations with the cash in hand?
At the current liabilities level of US$4.4b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. For Electronic 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.
Does TEL face the risk of succumbing to its debt-load?
With debt at 38% of equity, TEL may be thought of as appropriately levered. TEL is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether TEL is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For TEL, the ratio of 27.02x suggests that interest is comfortably covered. Large-cap investments like TEL are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
TEL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure TEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research TE Connectivity to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TEL’s future growth? Take a look at our free research report of analyst consensus for TEL’s outlook.
- Valuation: What is TEL 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 TEL 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.