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AmerisourceBergen Corporation (NYSE:ABC), a large-cap worth US$18b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. Today we will look at AmerisourceBergen’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ABC here.
How does ABC’s operating cash flow stack up against its debt?
Over the past year, ABC has maintained its debt levels at around US$4.7b including long-term debt. At this constant level of debt, ABC currently has US$2.5b remaining in cash and short-term investments for investing into the business. On top of this, ABC has produced cash from operations of US$1.9b in the last twelve months, leading to an operating cash to total debt ratio of 40%, indicating that ABC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ABC’s case, it is able to generate 0.4x cash from its debt capital.
Can ABC pay its short-term liabilities?
With current liabilities at US$29b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.94x.
Is ABC’s debt level acceptable?
Since equity is smaller than total debt levels, AmerisourceBergen is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of ABC’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In ABC’s case, the ratio of 9.02x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ABC and other large-cap investments thought to be safe.
ABC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how ABC has been performing in the past. I suggest you continue to research AmerisourceBergen to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ABC’s future growth? Take a look at our free research report of analyst consensus for ABC’s outlook.
- Valuation: What is ABC 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 ABC 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.