Are Teva Pharmaceutical Industries Limited’s (NYSE:TEVA) Interest Costs Too High?
Investors pursuing a solid, dependable stock investment can often be led to Teva Pharmaceutical Industries Limited (NYSE:TEVA), a large-cap worth US$18.91B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Teva Pharmaceutical Industries’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TEVA here. View our latest analysis for Teva Pharmaceutical Industries
How much cash does TEVA generate through its operations?
Over the past year, TEVA has reduced its debt from US$35.80B to US$32.48B , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$963.00M , ready to deploy into the business. On top of this, TEVA has produced cash from operations of US$3.51B in the last twelve months, leading to an operating cash to total debt ratio of 10.80%, indicating that TEVA’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In TEVA’s case, it is able to generate 0.11x cash from its debt capital.
Can TEVA pay its short-term liabilities?
At the current liabilities level of US$17.92B liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.86x, which is below the prudent industry ratio of 3x.
Is TEVA’s debt level acceptable?
Teva Pharmaceutical Industries is a highly levered company given that total debt exceeds equity. 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 TEVA is currently unprofitable, there’s a question of sustainability of its current operations. 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:
With a high level of debt on its balance sheet, TEVA could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for TEVA to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for TEVA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Teva Pharmaceutical Industries to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for TEVA’s future growth? Take a look at our free research report of analyst consensus for TEVA’s outlook.
2. Valuation: What is TEVA 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 TEVA 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.
