These 4 Measures Indicate That Pfizer (NSE:PFIZER) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Pfizer Limited (NSE:PFIZER) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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

What Is Pfizer's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Pfizer had ₹1.12b of debt, an increase on ₹25.0m, over one year. But on the other hand it also has ₹11.0b in cash, leading to a ₹9.86b net cash position.

A Look At Pfizer's Liabilities

We can see from the most recent balance sheet that Pfizer had liabilities of ₹7.74b falling due within a year, and liabilities of ₹985.2m due beyond that. On the other hand, it had cash of ₹11.0b and ₹3.08b worth of receivables due within a year. So it can boast ₹5.33b 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.

In addition to that, we're happy to report that Pfizer has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 54% of its EBIT, about what we'd expect. 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 ₹9.86b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 46% over the last year. So is Pfizer's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Pfizer , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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