Previously in this series, we looked at Harley-Davidson’s (HOG) profitability and related factors. It’s also important for investors to pay attention to a company’s leverage position. High debt levels increase the risk profile of a company since debt is a contractual obligation that a company must fulfill regardless of market conditions. In this article, we’ll take a look at Harley-Davidson’s leverage position.
Harley-Davidson’s leverage position
At the end of 2015, ~45% of Harley-Davidson’s capital structure was made up of debt while the remaining portion was made up of equity. This weight of debt is much lower than that of other mainstream automakers such as General Motors (GM) and Ford (F), which have ~55% and ~70% weights of debt in their capital structure, respectively.
Net debt to EBITDA
Net debt is total debt minus cash and cash equivalents. It’s a good metric by which to analyze a company’s financial health. At the end of 2015, Harley-Davidson’s net-debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio was at 4.5x. The ratio increased from 2.9x a year ago, as the company borrowed $750 million in 2015 to fund the repurchase of its common stocks.
Interest coverage ratio
Note that the auto industry is highly capital-intensive in nature. For this reason, auto companies tend to utilize debt extensively. Therefore, it’s not always bad for a company to have high leverage. What matters most is a company’s ability to pay back its debt and related interest with ease. A company’s ability to pay back its debt can be measured by its interest coverage ratio.
At the end of 2015, Harley-Davidson’s interest coverage ratio stood at 95.4x. This high-interest coverage ratio shows that the company’s balance sheet is sound enough to cover its interest expenses.