3M’s debt profile
As seen in the analysis in Part Three of this series, 3M Company’s (MMM) financial leverage rose substantially in the five-year period between 2011 and 2015. However, the ratio may not reveal the true nature of the company’s leverage, as some liabilities could be more burdensome than others.
3M’s long-term debt, excluding the current portion, rose from 14.2% ($4.4 billion) of total capital in 2011 to 26.8% ($8.7 billion) of total capital in 2015. Its current portion of long-term debt in 2016 was $1.1 billion. 47% of its total long-term debt is expected to mature by 2020. Since its long-term debt rose significantly in the period of study, we can consider the possibility of an offsetting change in 3M’s working capital.
3M’s current ratio fell from 2.25 in 2011 to 1.54 in 2015, reflecting a fall in its cash and cash equivalents and a rise in its current portion of long-term debt. The quick ratio shows a similar profile, falling from 1.39 in 2011 to 0.85 in 2015.
The company’s inventory, receivables, and payables management has worsened overall, with the company taking 94 days to convert its raw materials to cash in 2015 compared to 85 days in 2011.
Committed credit facilities
3M Company has an undrawn committed credit facility of $2.3 billion. Committed credit facilities require companies to meet specific conditions. Thus, 3M must maintain an interest coverage ratio of 3.0. 3M’s interest coverage, which is the ratio of EBITDA (earnings before interest, tax, depreciation, and amortization) to net interest expense, was 56.0 toward the end of 2015, highlighting a strong credit position.
3M has been given investment-grade ratings from various rating agencies. These include an “AA-” with a “stable outlook” from Standard & Poor’s and an “Aa3” with a “negative” outlook from Moody’s.
Companies aim for investment-grade ratings due to their importance as indicators of debt credit quality. High-quality debt leads to a low interest rate, as debtors face minimal default risk to finance debt. A downgrade to “junk” status would entail higher interest payments to account for the increased default risk undertaken by investors.