Pfizer (NSE:PFIZER) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Pfizer Limited (NSE:PFIZER) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pfizer

What Is Pfizer's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Pfizer had debt of ₹1.01b, up from ₹928.3m in one year. But it also has ₹15.2b in cash to offset that, meaning it has ₹14.1b net cash.

A Look At Pfizer's Liabilities

We can see from the most recent balance sheet that Pfizer had liabilities of ₹9.61b falling due within a year, and liabilities of ₹1.17b due beyond that. On the other hand, it had cash of ₹15.2b and ₹2.04b worth of receivables due within a year. So it actually has ₹6.41b more liquid assets than total liabilities.

This short term liquidity is a sign that Pfizer could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Pfizer has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Pfizer grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Pfizer's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pfizer may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Pfizer recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Pfizer has ₹14.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹7.0b, being 75% of its EBIT. So is Pfizer's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Pfizer that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.