Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Investors pursuing a solid, dependable stock investment can often be led to Pfizer Inc. (NYSE:PFE), a large-cap worth US$237b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Pfizer’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PFE here.
Does PFE Produce Much Cash Relative To Its Debt?
Over the past year, PFE has ramped up its debt from US$41b to US$47b – this includes long-term debt. With this increase in debt, PFE's cash and short-term investments stands at US$12b to keep the business going. Additionally, PFE has produced cash from operations of US$16b in the last twelve months, resulting in an operating cash to total debt ratio of 33%, signalling that PFE’s debt is appropriately covered by operating cash.
Can PFE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$29b, it appears that the company has been able to meet these commitments with a current assets level of US$45b, leading to a 1.54x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PFE face the risk of succumbing to its debt-load?
With debt reaching 77% of equity, PFE may be thought of as relatively highly levered. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. The sustainability of PFE’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For PFE, the ratio of 20.4x suggests that interest is comfortably covered. Large-cap investments like PFE are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although PFE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around PFE's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how PFE has been performing in the past. I suggest you continue to research Pfizer to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PFE’s future growth? Take a look at our free research report of analyst consensus for PFE’s outlook.
- Valuation: What is PFE 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 PFE 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.