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Investors pursuing a solid, dependable stock investment can often be led to Gilead Sciences, Inc. (NASDAQ:GILD), a large-cap worth US$91b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. Today we will look at Gilead Sciences’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into GILD here.
How does GILD’s operating cash flow stack up against its debt?
GILD’s debt levels have fallen from US$29b to US$27b over the last 12 months , which also accounts for long term debt. With this debt payback, GILD’s cash and short-term investments stands at US$30b for investing into the business. On top of this, GILD has generated US$8.8b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 32%, signalling that GILD’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GILD’s case, it is able to generate 0.32x cash from its debt capital.
Does GILD’s liquid assets cover its short-term commitments?
At the current liabilities level of US$10b, it appears that the company has been able to meet these obligations given the level of current assets of US$35b, with a current ratio of 3.45x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does GILD face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Gilead Sciences is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if GILD’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GILD’s case, the ratio of 8.62x suggests that interest is well-covered. Large-cap investments like GILD are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
GILD’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around GILD’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how GILD has been performing in the past. I suggest you continue to research Gilead Sciences to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GILD’s future growth? Take a look at our free research report of analyst consensus for GILD’s outlook.
- Valuation: What is GILD 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 GILD 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.