With a market capitalization of US$30b, Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for ALXN to determine is solvency and liquidity and whether the stock is a sound investment.
ALXN’s Debt (And Cash Flows)
Over the past year, ALXN has maintained its debt levels at around US$3.2b which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$1.6b to keep the business going. Additionally, ALXN has generated cash from operations of US$426m during the same period of time, leading to an operating cash to total debt ratio of 13%, indicating that ALXN’s current level of operating cash is not high enough to cover debt.
Can ALXN pay its short-term liabilities?
With current liabilities at US$1.2b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.88x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Biotechs companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ALXN’s debt level acceptable?
With a debt-to-equity ratio of 35%, ALXN's debt level may be seen as prudent. ALXN is not taking on too much debt commitment, which may be constraining for future growth. We can test if ALXN’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ALXN's case, the ratio of 49.24x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ALXN and other large-cap investments thought to be safe.
ALXN’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure ALXN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Alexion Pharmaceuticals to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALXN’s future growth? Take a look at our free research report of analyst consensus for ALXN’s outlook.
- Valuation: What is ALXN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ALXN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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