Are Harris Corporation’s (NYSE:HRS) Interest Costs Too High?

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Harris Corporation (NYSE:HRS) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to their continued success lies in its financial health. I will provide an overview of Harris’s financial liquidity and leverage to give you an idea of Harris’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into HRS here. See our latest analysis for Harris

Does HRS produce enough cash relative to debt?

Over the past year, HRS has reduced its debt from US$4.52B to US$4.03B – this includes both the current and long-term debt. With this debt payback, HRS currently has US$484.00M remaining in cash and short-term investments for investing into the business. Moreover, HRS has produced US$569.00M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14.12%, indicating that HRS’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HRS’s case, it is able to generate 0.14x cash from its debt capital.

Can HRS pay its short-term liabilities?

Looking at HRS’s most recent US$1.93B liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.08x. For Aerospace & Defense companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

NYSE:HRS Historical Debt Mar 31st 18
NYSE:HRS Historical Debt Mar 31st 18

Can HRS service its debt comfortably?

Considering Harris’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can put the sustainability of HRS’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In HRS’s case, the ratio of 6.8x suggests that interest is well-covered. Large-cap investments like HRS are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.