With a market capitalization of $35.83B, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Vertex Pharmaceuticals
Can VRTX service its debt comfortably?
Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. For VRTX, the debt-to-equity ratio is 32.56%, which means the risk of facing a debt-overhang is very low. While debt-to-equity ratio has several factors at play, an easier way to check whether VRTX’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. VRTX’s interest on debt is sufficiently covered by earnings as it sits at around 4.68x. Debtors may be willing to loan the company more money, giving VRTX ample headroom to grow its debt facilities.
Does VRTX generate enough cash through operations?
A basic way to evaluate VRTX’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether VRTX has the ability to repay its debt with cash from its business, which is less of a concern for large companies. In the case of VRTX, operating cash flow over the past twelve months do cover its current debt,which means VRTX generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company.This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.
Are you a shareholder? VRTX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Since VRTX’s capital structure may change, You should continue examining market expectations for VRTX’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. Therefore, I recommend potential investors to look at VRTX’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.