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Merck & Co Inc. (NYSE:MRK), a large-cap worth US$155.50B, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. This article will examine Merck’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MRK here. Check out our latest analysis for Merck
How does MRK’s operating cash flow stack up against its debt?
MRK has sustained its debt level by about US$24.47B over the last 12 months comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$8.50B , ready to deploy into the business. On top of this, MRK has generated US$6.45B in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 26.35%, meaning that MRK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MRK’s case, it is able to generate 0.26x cash from its debt capital.
Can MRK meet its short-term obligations with the cash in hand?
Looking at MRK’s most recent US$18.61B liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MRK’s debt level acceptable?
With a debt-to-equity ratio of 70.77%, MRK can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if MRK’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For MRK, the ratio of 19.55x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes MRK and other large-cap investments thought to be safe.