Does AstraZeneca PLC’s (LON:AZN) Debt Level Pose A Problem?
Investors pursuing a solid, dependable stock investment can often be led to AstraZeneca PLC (LON:AZN), a large-cap worth UK£72.22b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. Today we will look at AstraZeneca’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AZN here.
View our latest analysis for AstraZeneca
Does AZN produce enough cash relative to debt?
AZN has sustained its debt level by about US$19.69b over the last 12 months – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$3.78b , ready to deploy into the business. Moreover, AZN has produced cash from operations of US$3.17b in the last twelve months, resulting in an operating cash to total debt ratio of 16.1%, signalling that AZN’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AZN’s case, it is able to generate 0.16x cash from its debt capital.
Can AZN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$17.20b liabilities, the company is not able to meet these obligations given the level of current assets of US$12.45b, with a current ratio of 0.72x below the prudent level of 3x.
Is AZN’s debt level acceptable?
Since equity is smaller than total debt levels, AstraZeneca is considered to have high leverage. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For AZN, the ratio of 10.61x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as AZN is a safe investment.
Next Steps:
With a high level of debt on its balance sheet, AZN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for AZN to increase its operational efficiency. In addition to this, 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 AZN has been performing in the past. I recommend you continue to research AstraZeneca to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AZN’s future growth? Take a look at our free research report of analyst consensus for AZN’s outlook.
Valuation: What is AZN 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 AZN 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
