Stock Analysis

West Pharmaceutical Services (NYSE:WST) Seems To Use Debt Rather Sparingly

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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 can see that West Pharmaceutical Services, Inc. (NYSE:WST) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for West Pharmaceutical Services

How Much Debt Does West Pharmaceutical Services Carry?

As you can see below, at the end of September 2020, West Pharmaceutical Services had US$259.7m of debt, up from US$195.1m a year ago. Click the image for more detail. But on the other hand it also has US$519.4m in cash, leading to a US$259.7m net cash position.

NYSE:WST Debt to Equity History February 9th 2021

How Strong Is West Pharmaceutical Services' Balance Sheet?

According to the last reported balance sheet, West Pharmaceutical Services had liabilities of US$447.7m due within 12 months, and liabilities of US$416.2m due beyond 12 months. Offsetting this, it had US$519.4m in cash and US$373.0m in receivables that were due within 12 months. So it can boast US$28.5m more liquid assets than total liabilities.

Having regard to West Pharmaceutical Services' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$21.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, West Pharmaceutical Services boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, West Pharmaceutical Services grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if West Pharmaceutical Services 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While West Pharmaceutical Services 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. Over the most recent three years, West Pharmaceutical Services 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 we empathize with investors who find debt concerning, you should keep in mind that West Pharmaceutical Services has net cash of US$259.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 32% over the last year. So we don't think West Pharmaceutical Services's use of debt is risky. We'd be very excited to see if West Pharmaceutical Services insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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