What Does SWK’s Interest Coverage Ratio Indicate?



SWK’s interest expense

Stanley Black & Decker’s (SWK) interest expense has risen since 2012, primarily due to an increase in debt. In 2012, SWK’s interest expense was at $144.2 million and had risen to $194.5 million by the end of 2016. However, at the end of 2Q17, SWK’s interest expense was at $107.3 million as compared to $95 million in 2Q16. This decline was primarily due to the termination of interest rate swaps of company’s fixed-rate debt.

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Interest coverage ratio

The interest coverage ratio indicates how well a company can service its debt. It’s determined by dividing the company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better it is for the company, as it can easily service its debt.

With the increase in interest expense, we need to check if SWK can service its debt efficiently or not. At the end of 2Q17, SWK’s interest coverage ratio stood at 8.74x. Since 2012, SWK’s EBIT has risen significantly at a CAGR (compound annual growth rate) of approximately 20% from $686.4 million in 2012 to $1.4 billion in 2016. Thus, the interest coverage ratio of SWK has also grown significantly.

SWK’s peers Honeywell (HON), Dover (DOV), and General Electric (GE) have interest coverage ratios of 23.75x, 7.30x, and 4.20x, respectively. With the exception of Honeywell, SWK’s interest coverage is better than its peers. SWK has no issues serving its debt.

Investors looking to invest in SWK indirectly can invest in the iShares Edge MSCI Multifactor Industrials ETF (INDF), which invests 3.1% of its portfolio in Stanley Black & Decker as of October 2, 2017.

In the next part, we’ll look into analysts’ latest ratings for SWK.


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