These 4 Measures Indicate That Illinois Tool Works (NYSE:ITW) Is Using Debt Reasonably Well

Illinois Tool Works (NYSE:ITW) has demonstrated a responsible approach to managing its debt, as evidenced by several key financial metrics. By examining these measures, investors can gain insight into the company's debt management strategy and assess its financial health.


Firstly, ITW's net debt to EBITDA ratio provides a clear indication of its debt levels relative to its earnings. This ratio has remained relatively stable over the past five years, hovering around 1.6. This suggests that ITW has maintained a consistent level of debt, without allowing it to become excessive. In comparison, the average and median net debt to EBITDA ratios of ITW's industry peers are 2.0 and 1.8, respectively, indicating that ITW is using debt more conservatively than its competitors.


Secondly, ITW's interest cover ratio, which measures its ability to meet its interest expenses, has remained strong. Over the past decade, this ratio has consistently exceeded 15, indicating that ITW has ample earnings to cover its interest payments. In comparison, the historical average interest cover ratio for ITW's industry peers is around 10, highlighting ITW's robust financial position.


Thirdly, ITW's free cash flow to debt ratio, which measures its ability to generate cash to service its debt, has remained stable. Over the past five years, this ratio has averaged around 0.6, indicating that ITW generates sufficient cash flow to meet its debt obligations. In comparison, the average free cash flow to debt ratio for ITW's industry peers is around 0.5, suggesting that ITW is more capable of managing its debt than its competitors.


Lastly, ITW's debt-to-equity ratio, which measures the proportion of its financing that comes from debt versus equity, has remained relatively low. Over the past five years, this ratio has averaged around 0.3, indicating that ITW relies more on equity financing than debt. In comparison, the average debt-to-equity ratio for ITW's industry peers is around 0.5, suggesting that ITW is more conservative in its use of debt than its competitors.


In conclusion, ITW's debt management strategy is characterized by a responsible use of debt, as evidenced by its stable net debt to EBITDA ratio, strong interest cover ratio, stable free cash flow to debt ratio, and low debt-to-equity ratio. By maintaining these metrics within reasonable ranges, ITW demonstrates a commitment to financial discipline and a responsible approach to debt management.