Pfizer (NSE:PFIZER) could easily take on more debt

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Mostly, Pfizer Limited (NSE: PFIZER) is in debt. But does this debt worry shareholders?

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Pfizer

What is Pfizer’s debt?

The image below, which you can click on for more details, shows that as of September 2021, Pfizer had a debt of ₹1.01 billion, up from ₹928.3 million in a year. But he also has ₹15.2 billion in cash to offset this, meaning he has a net cash of ₹14.1 billion.

NSEI: PFIZER Debt to Equity March 29, 2022

A look at Pfizer’s responsibilities

We can see from the most recent balance sheet that Pfizer had liabilities of ₹9.61 billion due within a year, and liabilities of ₹1.17 billion due beyond. On the other hand, it had cash of ₹15.2 billion and ₹2.04 billion in receivables due within one year. So he actually has ₹6.41 billion Continued liquid assets than total liabilities.

This short-term liquidity is a sign that Pfizer could probably service its debt easily, as its balance sheet is far from stretched. Put simply, the fact that Pfizer has more cash than debt is arguably a good indication that it can safely manage its debt.

And we also warmly note that Pfizer grew its EBIT by 16% last year, making its leverage more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it’s Pfizer’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Pfizer may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Pfizer has recorded free cash flow of 75% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Abstract

While it’s always a good idea to investigate a company’s debt, in this case Pfizer has ₹14.1 billion in net cash and a decent balance sheet. And it impressed us with a free cash flow of ₹7.0 billion, or 75% of its EBIT. So is Pfizer’s debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 1 warning sign for Pfizer which you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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