Is AstraZeneca (LON: AZN) using too much debt?

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies AstraZeneca SA (LON: AZN) uses debt. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for AstraZeneca

What is AstraZeneca’s debt?

The image below, which you can click for more details, shows that as of June 2021, AstraZeneca was in debt of US $ 29.2 billion, up from US $ 21.5 billion in a year. On the other hand, it has $ 15.6 billion in cash, resulting in net debt of around $ 13.6 billion.

LSE: AZN History of debt to equity September 27, 2021

A look at AstraZeneca’s responsibilities

According to the latest published balance sheet, AstraZeneca had liabilities of US $ 22.2 billion due within 12 months and liabilities of US $ 35.7 billion due beyond 12 months. In compensation for these obligations, it had cash of US $ 15.6 billion as well as receivables valued at US $ 6.84 billion due within 12 months. Its liabilities therefore total $ 35.5 billion more than the combination of its cash and short-term receivables.

Of course, AstraZeneca has a titanic market cap of US $ 187.3 billion, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

AstraZeneca’s net debt stands at a very reasonable level of 2.1 times its EBITDA, while its EBIT only covered its interest expense 6.8 times last year. While we’re not worried about these numbers, it’s worth noting that the company’s cost of debt does have a real impact. It is important to note that AstraZeneca’s EBIT has been essentially stable over the past twelve months. We would rather see some growth in earnings as it always helps reduce debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine AstraZeneca’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly verify whether this EBIT generates a corresponding free cash flow. Over the past three years, AstraZeneca has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

Our point of view

The good news is that AstraZeneca’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. And we also thought his interest coverage was positive. All these things considered, it looks like AstraZeneca can comfortably manage its current debt levels. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 4 warning signs we spotted with AstraZeneca.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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

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