Worldwide interest rates are at historically low levels. They have been this way for some years now. The Reserve Bank of Australia has left the cash rate at 1.50% since August 2016. The last time it lifted the cash rate was way back in November 2010 when it set the cash rate at 4.75%. Since then, it has made 12 separate rate cuts over 7 years.
However, rates can’t and won’t stay so low forever. The United States Federal Reserve has reacted to a strengthening economy by lifting rates and has signalled its intention to continue to lift rates throughout 2018.
Low rates have strengthened share prices as companies have been able to borrow money at very low rates and use it for business growth. In some cases, this can cover over the cracks of a poor business model. As interest rates begin to rise, those companies with large debts and poor cash flow will begin to suffer.
Here are a few companies who are well placed to withstand rising interest due to relatively low levels of debt and good cash flow.
Cochlear Limited (ASX: COH)
Cochlear is a manufacturer and distributor of cochlear implantable devices for people who are hearing impaired. The company has operations in more than 20 countries across the Americas, Asia, the Middle East, Europe and Asia Pacific regions.
To June 2017 Cochlear reported earnings before interest and tax (EBIT) of $315.6 million. With interest expenses of $6.8 million, Cochlear can cover its interest expenses with EBIT 46.4 times.
Fisher & Paykel Healthcare Corp Ltd (ASX: FPH)
Fisher & Paykel design, manufacture and market medical device products and systems for use in respiratory care, acute care and the treatment of obstructive sleep apnoea.
To March 2017, Fisher & Paykel reported EBIT of $238.2 million and interest expenses of $1.5 million. Fisher & Paykel can cover its interest payments with EBIT a total of 158.8 times.
Reece Ltd (ASX: REH)
Reece is an importer, wholesaler, distributer, marketer and retailer of bathroom and plumbing products and services. The company also provides irrigation products, civil products, onsite services, and spare parts for heating, air conditioning, and refrigeration products.
To June 2017 Reece reported an EBIT of $307.9 million. With interest expenses of $4.8 million, Reece can cover its interest expenses with its EBIT 64 times.
Bellamy’s Australia Ltd (ASX: BAL)
Bellamy’s offer a range of organic food and formula products for babies, toddlers and young children. The company has over 30 products in its range from birth to early childhood.
Last financial year Bellamy’s reported EBIT of $36.3 million, and interest expenses of $1.3 million. That means that Bellamy’s can cover its interest payments a total of 27.9 times based on its 2017 financial reports.
Maintaining low levels of debt and generating high levels of cash mean that companies are well placed to ride a rise in interest rates through 2018. The four companies mentioned above are good quality businesses and rising interest rates won’t hamper their efforts for growth.
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Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.