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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Bristol-Myers Squibb Company (NYSE:BMY) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Bristol-Myers Squibb
How Much Debt Does Bristol-Myers Squibb Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bristol-Myers Squibb had US$49.8b of debt, an increase on US$37.7b, over one year. On the flip side, it has US$8.09b in cash leading to net debt of about US$41.7b.
How Strong Is Bristol-Myers Squibb's Balance Sheet?
We can see from the most recent balance sheet that Bristol-Myers Squibb had liabilities of US$22.6b falling due within a year, and liabilities of US$53.8b due beyond that. Offsetting these obligations, it had cash of US$8.09b as well as receivables valued at US$14.9b due within 12 months. So it has liabilities totalling US$53.5b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Bristol-Myers Squibb has a huge market capitalization of US$114.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
With a debt to EBITDA ratio of 2.2, Bristol-Myers Squibb uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 7.1 times its interest expenses harmonizes with that theme. Bristol-Myers Squibb grew its EBIT by 6.1% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bristol-Myers Squibb'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.