With a market capitalization of US$49b, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for VRTX, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
Does VRTX Produce Much Cash Relative To Its Debt?
VRTX's debt level has been constant at around US$591m over the previous year . At this stable level of debt, VRTX currently has US$3.2b remaining in cash and short-term investments , ready to be used for running the business. Moreover, VRTX has generated cash from operations of US$1.3b over the same time period, resulting in an operating cash to total debt ratio of 215%, meaning that VRTX’s operating cash is sufficient to cover its debt.
Can VRTX pay its short-term liabilities?
With current liabilities at US$1.1b, it appears that the company has been able to meet these obligations given the level of current assets of US$3.8b, with a current ratio of 3.43x. The current ratio is calculated by dividing current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is VRTX’s debt level acceptable?
With debt at 13% of equity, VRTX may be thought of as appropriately levered. This range is considered safe as VRTX is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether VRTX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For VRTX, the ratio of 19.46x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes VRTX and other large-cap investments thought to be safe.
VRTX’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure VRTX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Vertex Pharmaceuticals to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VRTX’s future growth? Take a look at our free research report of analyst consensus for VRTX’s outlook.
- Valuation: What is VRTX 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 VRTX 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 firstname.lastname@example.org. 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.