Is Perrigo Company plc’s (NYSE:PRGO) Balance Sheet A Threat To Its Future?
Investors pursuing a solid, dependable stock investment can often be led to Perrigo Company plc (NYSE:PRGO), a large-cap worth US$12.43B. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Perrigo Company’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PRGO here. Check out our latest analysis for Perrigo Company
How does PRGO’s operating cash flow stack up against its debt?
PRGO has sustained its debt level by about US$5.80B over the last 12 months – this includes both the current and long-term debt. At this current level of debt, PRGO’s cash and short-term investments stands at US$660.50M , ready to deploy into the business. Moreover, PRGO has generated US$654.90M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 11.30%, meaning that PRGO’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In PRGO’s case, it is able to generate 0.11x cash from its debt capital.
Can PRGO meet its short-term obligations with the cash in hand?
Looking at PRGO’s most recent US$1.84B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.53x. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can PRGO service its debt comfortably?
PRGO is a relatively highly levered company with a debt-to-equity of 61.12%. 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. However, since PRGO is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, PRGO 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. Keep in mind I haven’t considered other factors such as how PRGO has been performing in the past. I recommend you continue to research Perrigo Company to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for PRGO’s future growth? Take a look at our free research report of analyst consensus for PRGO’s outlook.
2. Valuation: What is PRGO 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 PRGO 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.
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.
