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What does Johnson Controls International plc's (NYSE:JCI) Balance Sheet Tell Us About Its Future?

Simply Wall St

Johnson Controls International plc (NYSE:JCI), a large-cap worth US$33b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Johnson Controls International’s financial liquidity and leverage to give you an idea of Johnson Controls International’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 JCI here.

Check out our latest analysis for Johnson Controls International

Does JCI Produce Much Cash Relative To Its Debt?

Over the past year, JCI has maintained its debt levels at around US$12b including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$239m , ready to be used for running the business. Additionally, JCI has generated cash from operations of US$2.6b over the same time period, leading to an operating cash to total debt ratio of 21%, signalling that JCI’s current level of operating cash is high enough to cover debt.

Can JCI pay its short-term liabilities?

With current liabilities at US$13b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is the number you get when you divide current assets by current liabilities.

NYSE:JCI Historical Debt, July 22nd 2019

Is JCI’s debt level acceptable?

With debt reaching 58% of equity, JCI may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of JCI’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For JCI, the ratio of 9.18x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as JCI is a safe investment.

Next Steps:

JCI’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure JCI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Johnson Controls International to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for JCI’s future growth? Take a look at our free research report of analyst consensus for JCI’s outlook.
  2. Valuation: What is JCI 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 JCI is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.