Investors pursuing a solid, dependable stock investment can often be led to Pfizer Inc. (NYSE:PFE), a large-cap worth US$233b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to extending previous success is in the health of the company’s financials. This article will examine Pfizer’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 PFE here.
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PFE’s Debt (And Cash Flows)
PFE has built up its total debt levels in the last twelve months, from US$41b to US$47b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$12b to keep the business going. Additionally, PFE has generated cash from operations of US$16b over the same time period, resulting in an operating cash to total debt ratio of 33%, meaning that PFE’s current level of operating cash is high enough to cover debt.
Can PFE meet its short-term obligations with the cash in hand?
Looking at PFE’s US$29b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$45b, with a current ratio of 1.54x. The current ratio is the number you get when you divide current assets by current liabilities. For Pharmaceuticals 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.
Does PFE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 79%, PFE can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if PFE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PFE, the ratio of 20.4x suggests that interest is amply covered. Large-cap investments like PFE are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although PFE’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. Since there is also no concerns around PFE’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PFE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Pfizer to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PFE’s future growth? Take a look at our free research report of analyst consensus for PFE’s outlook.
- Valuation: What is PFE 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 PFE 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.
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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.