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There are a number of reasons that attract investors towards large-cap companies such as Textron Inc. ( NYSE:TXT ), with a market cap of US$12b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to their continued success lies in its financial health. This article will examine Textron’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TXT here .
TXT’s Debt (And Cash Flows)
TXT has built up its total debt levels in the last twelve months, from US$3.9b to US$4.2b , which includes long-term debt. With this increase in debt, TXT's cash and short-term investments stands at US$646m to keep the business going. Additionally, TXT has produced US$976m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 23%, signalling that TXT’s debt is appropriately covered by operating cash.
Does TXT’s liquid assets cover its short-term commitments?
Looking at TXT’s US$3.4b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$7.4b, with a current ratio of 2.17x. The current ratio is calculated by dividing current assets by current liabilities. For Aerospace & Defense companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is TXT’s debt level acceptable?
With debt reaching 74% of equity, TXT 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. We can assess the sustainability of TXT’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For TXT, the ratio of 8.4x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes TXT and other large-cap investments thought to be safe.
At its current level of cash flow coverage, TXT has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how TXT has been performing in the past. I suggest you continue to research Textron to get a better picture of the stock by looking at:
- Future Outlook : What are well-informed industry analysts predicting for TXT’s future growth? Take a look at our free research report of analyst consensus for TXT’s outlook.
- Valuation : What is TXT 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 TXT 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.