The size of AbbVie Inc (NYSE:ABBV), a US$182.17B large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, its financial health remains the key to continued success. Let’s take a look at AbbVie’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into ABBV here. Check out our latest analysis for AbbVie

Does ABBV produce enough cash relative to debt?

Over the past year, ABBV has maintained its debt levels at around US$37.37B – this includes both the current and long-term debt. At this current level of debt, ABBV’s cash and short-term investments stands at US$9.79B , ready to deploy into the business. On top of this, ABBV has generated cash from operations of US$9.96B during the same period of time, resulting in an operating cash to total debt ratio of 26.65%, signalling that ABBV’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ABBV’s case, it is able to generate 0.27x cash from its debt capital.

Does ABBV’s liquid assets cover its short-term commitments?

At the current liabilities level of US$16.64B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$21.22B, with a current ratio of 1.28x. Usually, for Biotechs companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does ABBV face the risk of succumbing to its debt-load?

Considering AbbVie’s total debt outweighs its equity, the company is deemed highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if ABBV’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In ABBV’s case, the ratio of 10.6x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ABBV are considered a risk-averse investment.