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Biogen Inc. (NASDAQ:BIIB), a large-cap worth US$45b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Biogen’s financial liquidity and leverage to give you an idea of Biogen’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into BIIB here.
BIIB’s Debt (And Cash Flows)
Over the past year, BIIB has ramped up its debt from US$5.9b to US$6.4b , which accounts for long term debt. With this increase in debt, BIIB currently has US$3.9b remaining in cash and short-term investments to keep the business going. Additionally, BIIB has produced US$6.2b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 97%, meaning that BIIB’s debt is appropriately covered by operating cash.
Can BIIB meet its short-term obligations with the cash in hand?
Looking at BIIB’s US$3.1b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.84x. The current ratio is the number you get when you divide current assets by current liabilities. For Biotechs companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can BIIB service its debt comfortably?
BIIB is a relatively highly levered company with a debt-to-equity of 46%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. 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 BIIB’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In BIIB’s case, the ratio of 79.81x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like BIIB are considered a risk-averse investment.
Although BIIB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for BIIB’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Biogen to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BIIB’s future growth? Take a look at our free research report of analyst consensus for BIIB’s outlook.
- Valuation: What is BIIB 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 BIIB is currently mispriced by the market.
- 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 firstname.lastname@example.org. 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.