Has Allergan plc (NYSE:AGN) Got Enough Cash?

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Allergan plc (NYSE:AGN), a large-cap worth US$46b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for AGN to determine is solvency and liquidity and whether the stock is a sound investment.

View our latest analysis for Allergan

How does AGN’s operating cash flow stack up against its debt?

Over the past year, AGN has reduced its debt from US$30b to US$24b – this includes long-term debt. With this reduction in debt, AGN currently has US$1.9b remaining in cash and short-term investments for investing into the business. Additionally, AGN has produced US$5.6b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 24%, indicating that AGN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In AGN’s case, it is able to generate 0.24x cash from its debt capital.

Can AGN meet its short-term obligations with the cash in hand?

With current liabilities at US$5.7b, it seems that the business has been able to meet these obligations given the level of current assets of US$6.5b, with a current ratio of 1.13x. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:AGN Historical Debt February 20th 19
NYSE:AGN Historical Debt February 20th 19

Is AGN’s debt level acceptable?

With a debt-to-equity ratio of 37%, AGN’s debt level may be seen as prudent. AGN is not taking on too much debt commitment, which may be constraining for future growth. AGN’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

Although AGN’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how AGN has been performing in the past. I suggest you continue to research Allergan to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AGN’s future growth? Take a look at our free research report of analyst consensus for AGN’s outlook.
  2. Valuation: What is AGN 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 AGN is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.