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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Pfizer Limited (NSE:PFIZER) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Pfizer Carry?
The chart below, which you can click on for greater detail, shows that Pfizer had ₹25.0m in debt in March 2019; about the same as the year before. But on the other hand it also has ₹18.9b in cash, leading to a ₹18.9b net cash position.
How Strong Is Pfizer's Balance Sheet?
The latest balance sheet data shows that Pfizer had liabilities of ₹8.92b due within a year, and liabilities of ₹369.6m falling due after that. Offsetting these obligations, it had cash of ₹18.9b as well as receivables valued at ₹3.49b due within 12 months. So it actually has ₹13.1b more liquid assets than total liabilities.
This surplus suggests that Pfizer has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pfizer has more cash than debt is arguably a good indication that it can manage its debt safely.
Fortunately, Pfizer grew its EBIT by 9.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pfizer can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pfizer 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. Over the most recent three years, Pfizer recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company's debt, in this case Pfizer has ₹19b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.8% in the last twelve months. So we don't think Pfizer's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Pfizer, you may well want to click here to check an interactive graph of its earnings per share history.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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