Does West Pharmaceutical Services (NYSE:WST) Have A Healthy Balance Sheet?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, West Pharmaceutical Services, Inc. (NYSE:WST) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for West Pharmaceutical Services
What Is West Pharmaceutical Services's Debt?
As you can see below, West Pharmaceutical Services had US$260.8m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$615.5m in cash offsetting this, leading to net cash of US$354.7m.
A Look At West Pharmaceutical Services' Liabilities
The latest balance sheet data shows that West Pharmaceutical Services had liabilities of US$503.4m due within a year, and liabilities of US$435.9m falling due after that. Offsetting this, it had US$615.5m in cash and US$385.3m in receivables that were due within 12 months. So it can boast US$61.5m more liquid assets than total liabilities.
This state of affairs indicates that West Pharmaceutical Services' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$21.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, West Pharmaceutical Services boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, West Pharmaceutical Services grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine West Pharmaceutical Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. West Pharmaceutical Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, West Pharmaceutical Services produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that West Pharmaceutical Services has net cash of US$354.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think West Pharmaceutical Services's use of debt is risky. Another factor that would give us confidence in West Pharmaceutical Services would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
