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What does Parker-Hannifin Corporation’s (PH) Balance Sheet Tell Us Abouts Its Future?

With a market capitalization of $24.82B, Parker-Hannifin Corporation (NYSE:PH) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. There are always disruptions which destabilize an existing industry, and although large-caps are hard to knock down, it is useful to understand its level of resilience. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Parker-Hannifin

Does PH face the risk of succumbing to its debt-load?

A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. In the case of PH, the debt-to-equity ratio is over 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. We can test if PH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In PH’s case, its interest is excessively covered by its earnings as the ratio sits at 8.59x. Lenders may be less hesitant to lend out more funding as PH’s high interest coverage is seen as responsible and safe practice.

Does PH generate an acceptable amount of cash through operations?

NYSE:PH Historical Debt Dec 9th 17
NYSE:PH Historical Debt Dec 9th 17

A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether PH has the ability to repay its debt with cash from its business, which is less of a concern for large companies. Last year, PH’s operating cash flow was 0.24x its current debt. This means, over a tenth of PH’s near term debt can be covered by its day-to-day cash income, which somewhat reduces its riskiness to its debtholders.

Next Steps:

Are you a shareholder? With a high level of debt on its balance sheet, PH could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe PH can sustainably increase its operational efficiency going forward. Since PH’s financial situation could change over time, I recommend researching market expectations for PH’s future growth on our free analysis platform.

Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. This is why I encourage potential investors to examine PH’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.


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.

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