Can Sherwin-Williams’ Interest Coverage Ratio Find Its Way Back Up?



Sherwin-Williams’ interest expense

Sherwin-Williams’ rising debt has resulted in an increase in interest expenses. At the end of  3Q17, SHW’s interest expense stood at $174 million as compared to $110.7 million in 3Q16, an increase of 57% on a year-over-year basis. As a result, SHW’s net income fell despite an increase in net sales. In the first nine months of 2017, SHW’s net income from continuing operations fell 1.4% on a year-over-year basis from $929 million to $916 million.

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.

With the increase in interest expense, it’s important for investors to see if SHW can service its debt efficiently or not. At the end of 3Q17, SHW’s interest coverage ratio stood at 5.50x, which is well below the industry average of 6.40x. Since 2012, SHW’s interest coverage ratio has fallen due to increased interest expense.

SHW’s peers PPG Industries (PPG), RPM International (RPM), and Axalta (AXTA) have interest coverage ratios of 19.90x, 6.60x, and 2.10x, respectively. Although SHW’s interest coverage is well below the industry average, SHW can easily service its debt.

Investors looking to invest in SHW can invest in the PowerShares DWA Industrials Momentum Portfolio (PRN), which has invested 4.9% of its portfolio in SHW as of December 26, 2017.

In the next part, we’ll look into SHWs valuations.

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