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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Pfizer Inc. (NYSE:PFE) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Pfizer
What Is Pfizer's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Pfizer had US$67.9b of debt, an increase on US$64.1b, over one year. However, because it has a cash reserve of US$9.95b, its net debt is less, at about US$58.0b.
How Strong Is Pfizer's Balance Sheet?
We can see from the most recent balance sheet that Pfizer had liabilities of US$43.2b falling due within a year, and liabilities of US$83.7b due beyond that. Offsetting these obligations, it had cash of US$9.95b as well as receivables valued at US$17.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$99.3b.
This is a mountain of leverage even relative to its gargantuan market capitalization of US$142.4b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Pfizer has net debt to EBITDA of 3.2 suggesting it uses a fair bit of leverage to boost returns. But the high interest coverage of 7.1 suggests it can easily service that debt. The bad news is that Pfizer saw its EBIT decline by 17% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pfizer's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.