Is Lennar Corporation's (NYSE:LEN) Balance Sheet A Threat To Its Future?

Simply Wall St

Sat, Jun 1, 2019, 7:13 AM

There are a number of reasons that attract investors towards large-cap companies such as Lennar Corporation (NYSE:LEN), with a market cap of US$16b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. I will provide an overview of Lennar’s financial liquidity and leverage to give you an idea of Lennar’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into LEN here.

View our latest analysis for Lennar

LEN’s Debt (And Cash Flows)

LEN's debt levels have fallen from US$12b to US$10b over the last 12 months – this includes long-term debt. With this debt payback, LEN's cash and short-term investments stands at US$882m , ready to be used for running the business. Additionally, LEN has produced US$1.3b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 13%, indicating that LEN’s debt is not covered by operating cash.

Does LEN’s liquid assets cover its short-term commitments?

With current liabilities at US$3.6b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.93x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

Can LEN service its debt comfortably?

LEN is a relatively highly levered company with a debt-to-equity of 70%. 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. 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 test if LEN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LEN, the ratio of 213x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes LEN and other large-cap investments thought to be safe.