U.S. Markets open in 2 hrs 40 mins

Texas Instruments Incorporated (NASDAQ:TXN): Time For A Financial Health Check

Simply Wall St

Investors pursuing a solid, dependable stock investment can often be led to Texas Instruments Incorporated (NASDAQ:TXN), a large-cap worth US$99b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. This article will examine Texas Instruments’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into TXN here.

See our latest analysis for Texas Instruments

Does TXN produce enough cash relative to debt?

TXN’s debt levels surged from US$4.1b to US$5.1b over the last 12 months , which accounts for long term debt. With this rise in debt, TXN’s cash and short-term investments stands at US$4.2b for investing into the business. On top of this, TXN has generated cash from operations of US$7.2b in the last twelve months, resulting in an operating cash to total debt ratio of 142%, signalling that TXN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TXN’s case, it is able to generate 1.42x cash from its debt capital.

Can TXN meet its short-term obligations with the cash in hand?

Looking at TXN’s US$2.5b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.27x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

NasdaqGS:TXN Historical Debt, March 1st 2019

Does TXN face the risk of succumbing to its debt-load?

TXN is a relatively highly levered company with a debt-to-equity of 56%. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of TXN’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TXN’s case, the ratio of 52.99x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like TXN are considered a risk-averse investment.

Next Steps:

TXN’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 TXN’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 TXN has been performing in the past. I recommend you continue to research Texas Instruments to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TXN’s future growth? Take a look at our free research report of analyst consensus for TXN’s outlook.
  2. Valuation: What is TXN 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 TXN is currently mispriced by the market.
  3. 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.