Pfizer (NSE:PFIZER) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Pfizer Limited (NSE:PFIZER) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Pfizer

How Much Debt Does Pfizer Carry?

You can click the graphic below for the historical numbers, but it shows that Pfizer had ₹1.16b of debt in September 2023, down from ₹1.51b, one year before. But it also has ₹18.9b in cash to offset that, meaning it has ₹17.8b net cash.

How Healthy Is Pfizer's Balance Sheet?

We can see from the most recent balance sheet that Pfizer had liabilities of ₹6.14b falling due within a year, and liabilities of ₹1.19b due beyond that. On the other hand, it had cash of ₹18.9b and ₹1.74b worth of receivables due within a year. So it actually has ₹13.3b more liquid assets than total liabilities.

This surplus suggests that Pfizer has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pfizer boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Pfizer has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pfizer can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pfizer has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Pfizer produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pfizer has ₹17.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹4.3b, being 68% of its EBIT. So we don't have any problem with Pfizer's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Pfizer has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.