Yahoo Finance How Financially Strong Is Lear Corporation (NYSE:LEA)?
Lear Corporation (NYSE:LEA), a large-cap worth US$13.30b, comes to mind for investors seeking a strong and reliable stock investment. 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. This article will examine Lear’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 LEA here. See our latest analysis for Lear
How much cash does LEA generate through its operations?
LEA has sustained its debt level by about US$1.96b over the last 12 months made up of current and long term debt. At this constant level of debt, LEA’s cash and short-term investments stands at US$1.54b for investing into the business. On top of this, LEA has produced US$1.78b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 90.95%, indicating that LEA’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LEA’s case, it is able to generate 0.91x cash from its debt capital.
Does LEA’s liquid assets cover its short-term commitments?
With current liabilities at US$4.85b, it appears that the company has been able to meet these commitments with a current assets level of US$6.61b, leading to a 1.36x current account ratio. Usually, for Auto Components companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can LEA service its debt comfortably?
With a debt-to-equity ratio of 41.53%, LEA can be considered as an above-average leveraged company. 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For LEA, the ratio of 20.38x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes LEA and other large-cap investments thought to be safe.
Next Steps:
LEA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around LEA’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for LEA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Lear to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LEA’s future growth? Take a look at our free research report of analyst consensus for LEA’s outlook.
Valuation: What is LEA 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 LEA 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
