How Financially Strong Is Lonza Group Ltd (VTX:LONN)?

There are a number of reasons that attract investors towards large-cap companies such as Lonza Group Ltd (VTX:LONN), with a market cap of CHF22b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to their continued success lies in its financial health. I will provide an overview of Lonza Group’s financial liquidity and leverage to give you an idea of Lonza Group’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into LONN here.

Check out our latest analysis for Lonza Group

Does LONN Produce Much Cash Relative To Its Debt?

LONN has sustained its debt level by about CHF4.1b over the last 12 months which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at CHF478m to keep the business going. Additionally, LONN has generated CHF1.1b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26%, signalling that LONN’s current level of operating cash is high enough to cover debt.

Can LONN pay its short-term liabilities?

At the current liabilities level of CHF2.4b, the company has been able to meet these commitments with a current assets level of CHF3.5b, leading to a 1.48x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Life Sciences companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

SWX:LONN Historical Debt, April 23rd 2019
SWX:LONN Historical Debt, April 23rd 2019

Is LONN’s debt level acceptable?

With a debt-to-equity ratio of 66%, LONN can be considered as an above-average leveraged company. 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. We can assess the sustainability of LONN’s debt levels to the test by looking at how well interest payments are covered by earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In LONN’s case, the ratio of 9.81x 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 LONN are considered a risk-averse investment.

Next Steps:

Although LONN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 LONN has been performing in the past. You should continue to research Lonza Group to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for LONN’s future growth? Take a look at our free research report of analyst consensus for LONN’s outlook.
  2. Valuation: What is LONN 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 LONN 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.

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 editorial-team@simplywallst.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.