Why a Strong Balance Sheet Matters: General Electric and Honeywell Investors Take Note
Investors often focus on earnings, but a strong balance sheet helps to ensure companies can and will get earnings growth. Here are two real-life examples from General Electric (NYSE: GE) and Honeywell International (NASDAQ: HON) that help to explain why manageable debt and good working capital management matter so much.
It's no secret that GE's debt grew under former CEO Jeff Immelt as he pursued a strategy of investing for growth. He invested heavily in a slew of oil and gas businesses only to walk into the slump in the price of oil in 2014. In addition, the once highly profitable power business (mainly coal and gas-fired turbines) suffered a dramatic fall in end demand in 2018 due to the rise of renewable energy. It came only a few years after Immelt's $10.9 billion acquisition of Alstom's power assets.
While Immelt made acquisitions, GE's industrial debt grew while its earnings were getting weaker. Investors and rating agencies usually measure debt in terms of a multiple of earnings, for example the net debt to earnings before interest, taxation, depreciation, and amortization (EBITDA). Generally speaking a net debt to EBITDA multiple of 2.5 times EBITDA or less is seen as favorable for investment grade debt for an industrial company.
Source Fool.com
