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Galapagos NV (AMS:GLPG): Financial Strength Analysis

Simply Wall St

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Galapagos NV (AMS:GLPG), with a market cap of €6.3b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. GLPG’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GLPG here.

See our latest analysis for Galapagos

Can GLPG service its debt comfortably?

A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. The good news for investors is that Galapagos has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with GLPG, and the company has plenty of headroom and ability to raise debt should it need to in the future.

ENXTAM:GLPG Historical Debt, July 2nd 2019

Does GLPG’s liquid assets cover its short-term commitments?

Since Galapagos doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of €199m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.31x. The current ratio is calculated by dividing current assets by current liabilities. However, many consider a ratio above 3x to be high.

Next Steps:

GLPG has no debt in addition to ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and its investors, but some degree of debt could also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure GLPG has company-specific issues impacting its capital structure decisions. You should continue to research Galapagos to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GLPG’s future growth? Take a look at our free research report of analyst consensus for GLPG’s outlook.
  2. Valuation: What is GLPG 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 GLPG 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.