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Does Elanco Animal Health Incorporated's (NYSE:ELAN) Debt Level Pose A Problem?

Simply Wall St

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The size of Elanco Animal Health Incorporated (NYSE:ELAN), a US$12b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Elanco Animal Health’s financial liquidity and leverage to give you an idea of Elanco Animal Health’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ELAN here.

View our latest analysis for Elanco Animal Health

ELAN’s Debt (And Cash Flows)

ELAN has increased its debt level by about US$2.5b over the last 12 months accounting for long term debt. With this increase in debt, ELAN currently has US$272m remaining in cash and short-term investments to keep the business going. Additionally, ELAN has generated cash from operations of US$446m over the same time period, leading to an operating cash to total debt ratio of 18%, signalling that ELAN’s operating cash is less than its debt.

Can ELAN pay its short-term liabilities?

At the current liabilities level of US$708m, it appears that the company has been able to meet these obligations given the level of current assets of US$2.3b, with a current ratio of 3.22x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

NYSE:ELAN Historical Debt, June 19th 2019

Does ELAN face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 47%, ELAN can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether ELAN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ELAN's case, the ratio of 7.22x suggests that interest is well-covered. Large-cap investments like ELAN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

At its current level of cash flow coverage, ELAN has room for improvement to better cushion for events which may require debt repayment. 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 ELAN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Elanco Animal Health to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ELAN’s future growth? Take a look at our free research report of analyst consensus for ELAN’s outlook.
  2. Valuation: What is ELAN 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 ELAN is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.