There are a number of reasons that attract investors towards large-cap companies such as Roche Holding AG (VTX:ROG), with a market cap of CHF228b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. Let’s take a look at Roche Holding’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into ROG here.
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Does ROG Produce Much Cash Relative To Its Debt?
Over the past year, ROG has maintained its debt levels at around CHF19b including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CHF13b , ready to be used for running the business. Moreover, ROG has generated cash from operations of CHF20b during the same period of time, resulting in an operating cash to total debt ratio of 106%, indicating that ROG’s operating cash is sufficient to cover its debt.
Does ROG’s liquid assets cover its short-term commitments?
Looking at ROG’s CHF23b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. The current ratio is the number you get when you divide current assets by current liabilities. For Pharmaceuticals companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ROG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 62%, ROG can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether ROG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For ROG, the ratio of 32.92x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ROG and other large-cap investments thought to be safe.
ROG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how ROG has been performing in the past. You should continue to research Roche Holding to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ROG’s future growth? Take a look at our free research report of analyst consensus for ROG’s outlook.
- Valuation: What is ROG 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 ROG 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.