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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that AbbVie Inc. (NYSE:ABBV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for AbbVie
How Much Debt Does AbbVie Carry?
As you can see below, at the end of September 2024, AbbVie had US$71.3b of debt, up from US$61.2b a year ago. Click the image for more detail. However, it also had US$7.29b in cash, and so its net debt is US$64.0b.
How Strong Is AbbVie's Balance Sheet?
We can see from the most recent balance sheet that AbbVie had liabilities of US$43.1b falling due within a year, and liabilities of US$94.3b due beyond that. Offsetting this, it had US$7.29b in cash and US$11.5b in receivables that were due within 12 months. So it has liabilities totalling US$118.6b more than its cash and near-term receivables, combined.
AbbVie has a very large market capitalization of US$309.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
AbbVie's net debt of 2.5 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 9.0 times its interest expenses harmonizes with that theme. Unfortunately, AbbVie's EBIT flopped 10% over the last four quarters. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AbbVie can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.