There are a number of reasons that attract investors towards large-cap companies such as Techtronic Industries Company Limited (SEHK:669), with a market cap of HK$83.49B. One such reason is its ‘too big to fail’ aura which gives it the appearance of a strong and healthy investment. However, investors may not be aware of the metrics used to measure financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Techtronic Industries
Does 669 face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. For 669, the debt-to-equity ratio is 43.80%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. We can test if 669’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. 669’s profits amply covers interest at 42.39 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as 669’s high interest coverage is seen as responsible and safe practice.
How does 669’s operating cash flow stack up against its debt?
A basic way to evaluate 669’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether 669 has the ability to repay its debt with cash from its business, which is less of a concern for large companies. 669’s recent operating cash flow was 0.51 times its debt within the past year. This is a good sign, as over half of 669’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Next Steps:
Are you a shareholder? Although 669’s debt level is towards the higher end of the spectrum, investors shouldn’t panic since its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since 669’s capital structure may change, I recommend examining market expectations for 669’s future growth on our free analysis platform.