Is Novartis AG’s (VTX:NOVN) Balance Sheet A Threat To Its Future?

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Novartis AG (VTX:NOVN), a large-cap worth CHF210b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. This article will examine Novartis’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into NOVN here.

See our latest analysis for Novartis

How does NOVN’s operating cash flow stack up against its debt?

NOVN’s debt levels surged from US$29b to US$32b over the last 12 months , which accounts for long term debt. With this rise in debt, NOVN currently has US$16b remaining in cash and short-term investments , ready to deploy into the business. Additionally, NOVN has generated cash from operations of US$14b over the same time period, leading to an operating cash to total debt ratio of 44%, indicating that NOVN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NOVN’s case, it is able to generate 0.44x cash from its debt capital.

Does NOVN’s liquid assets cover its short-term commitments?

Looking at NOVN’s US$30b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$36b, leading to a 1.2x current account ratio. Usually, for Pharmaceuticals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SWX:NOVN Historical Debt, February 22nd 2019
SWX:NOVN Historical Debt, February 22nd 2019

Does NOVN face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 41%, NOVN 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times NOVN’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For NOVN, the ratio of 15.55x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes NOVN and other large-cap investments thought to be safe.

Next Steps:

NOVN’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. Since there is also no concerns around NOVN’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NOVN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Novartis to get a more holistic view of the large-cap by looking at:

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