There are a number of reasons that attract investors towards large-cap companies such as Zoetis Inc (NYSE:ZTS), with a market cap of US$40.63B. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. I will provide an overview of Zoetis’s financial liquidity and leverage to give you an idea of Zoetis’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ZTS here. View our latest analysis for Zoetis
How does ZTS’s operating cash flow stack up against its debt?
ZTS has built up its total debt levels in the last twelve months, from US$4.47B to US$4.95B , which comprises of short- and long-term debt. With this growth in debt, ZTS’s cash and short-term investments stands at US$1.56B for investing into the business. Moreover, ZTS has produced US$1.35B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 27.18%, meaning that ZTS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ZTS’s case, it is able to generate 0.27x cash from its debt capital.
Can ZTS pay its short-term liabilities?
With current liabilities at US$1.09B, the company has been able to meet these commitments with a current assets level of US$4.22B, leading to a 3.85x current account ratio. Though, anything above 3x is considered high and could mean that ZTS has too much idle capital in low-earning investments.
Is ZTS’s debt level acceptable?
Considering Zoetis’s total debt outweighs its equity, the company is deemed highly levered. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. We can put the sustainability of ZTS’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For ZTS, the ratio of 9.92x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ZTS are considered a risk-averse investment.
ZTS’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. I admit this is a fairly basic analysis for ZTS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Zoetis to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZTS’s future growth? Take a look at our free research report of analyst consensus for ZTS’s outlook.
- Valuation: What is ZTS 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 ZTS 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.
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.