What Does 3M’s Interest Coverage Ratio Suggest?



3M’s interest expense

3M Company’s (MMM) interest has been up and down. From 2012 to 2014, its debt was on a falling trend, primarily due to lower interest rates. 

Following its additional borrowing in 2015, 3M’s interest expense rose significantly to $199 million in 2016, compared to $149 million in 2015.

In 2014, 3M’s interest fell despite a rise in its debt level due to its ability to replace debt bearing higher interest rates with the debt bearing lower interest rates. So far in 2017, MMM has an interest expense of $45 million. If this amount is maintained, its interest expense for 2017 could be lower than it was in 2016, which could boost its net income.

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MMM’s interest coverage ratio

The interest coverage ratio is an indication of how well a company can service its debt. We can determine this by dividing the company’s EBIT (earnings before interest and tax) by its interest expense. A higher multiple tells us that a company can better service its debt. 

At the end of 1Q17, MMM’s interest coverage ratio was 39.40x, and its peers Honeywell (HON), Stanley Black & Decker (SWK), and General Electric (GE) had interest coverage ratios of 24.0x, 10.20x, and 1.73x, respectively. MMM’s interest coverage ratio is better than those of its peers, indicating that MMM can service its debt more easily.

You can invest in the Industrial Select Sector SPDR ETF (XLI) to gain indirect exposure to MMM. XLI has invested 5.8% of its portfolio in MMM as of July 3, 2017.

In the next article, we’ll look into analysts’ latest recommendations for 3M.


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