Investment Thesis
L3Harris demonstrates adequate profitability margins (8.9% net margin) typical of defense contractors, but faces critical cash generation issues with negative operating cash flow of -95M and negative free cash flow of -194M despite reporting positive accounting earnings. Poor capital efficiency (ROE 2.6%, ROA 1.2%) and deteriorating liquidity position (current ratio 1.03x, quick ratio 0.89x) signal structural financial stress that contradicts the stability expected from a mature defense/aerospace supplier.
Strengths
- Solid gross margin of 32.6% demonstrates pricing power and operational efficiency in core business
- Manageable leverage with debt-to-equity of 0.47x and strong interest coverage of 9.4x showing adequate debt servicing capacity
- Operating income of $652M and net income of $512M indicate profitable underlying operations
Risks
- Negative operating cash flow of -95M and negative free cash flow of -194M in mature business indicates potential working capital deterioration or structural cash generation issues
- Weak capital efficiency with ROE of 2.6% and ROA of 1.2% suggests $41.4B in assets is not being productively deployed
- Liquidity stress signals with current ratio barely above 1.0 (1.03x) and quick ratio below 1.0 (0.89x) despite $9.2B long-term debt obligations
- Flat net income growth (+0.0% YoY) with EPS growth driven by share buybacks rather than organic expansion
Key Metrics to Watch
- Operating cash flow trend and cash conversion rate - critical for investment viability
- Working capital management and customer payment cycles - may explain negative OCF
- Return on invested capital (ROIC) - must improve from current 1-2% range to justify capital base
- Liquidity position and cash reserve adequacy relative to debt maturity schedule
Financial Metrics
Revenue
5.7B
Net Income
512.0M
EPS (Diluted)
$2.72
Free Cash Flow
-194.0M
Total Assets
41.4B
Cash
590.0M
Profitability Ratios
Gross Margin
32.6%
Operating Margin
11.4%
Net Margin
8.9%
ROE
2.6%
ROA
1.2%
FCF Margin
-3.4%
Balance Sheet & Liquidity
Current Ratio
1.03x
Quick Ratio
0.89x
Debt/Equity
0.47x
Debt/Assets
52.4%
Interest Coverage
9.45x
Long-term Debt
9.2B
Disclaimer: This analysis is generated by AI based on publicly available SEC EDGAR filings.
It does not include stock price data and should not be considered financial advice.
All fundamental data is sourced from SEC public domain filings.
Always conduct your own research before making investment decisions.
Data Source: SEC EDGAR |
Analysis Date: 2026-05-06T18:09:09.655114 |
Data as of: 2026-04-03 |
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