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The size of 3M Company (NYSE:MMM), a US$121.66B large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. Today we will look at 3M’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MMM here. View our latest analysis for 3M
How does MMM’s operating cash flow stack up against its debt?
MMM’s debt levels surged from US$11.70B to US$14.01B over the last 12 months , which is made up of current and long term debt. With this increase in debt, MMM’s cash and short-term investments stands at US$4.13B , ready to deploy into the business. Additionally, MMM has produced US$6.24B in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 44.54%, meaning that MMM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MMM’s case, it is able to generate 0.45x cash from its debt capital.
Can MMM meet its short-term obligations with the cash in hand?
At the current liabilities level of US$7.69B liabilities, the company has been able to meet these commitments with a current assets level of US$14.28B, leading to a 1.86x current account ratio. Usually, for Industrials companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can MMM service its debt comfortably?
3M is a highly levered company given that total debt exceeds equity. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For MMM, the ratio of 22.31x suggests that interest is amply covered. Large-cap investments like MMM are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.