In This Article:
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Pfizer Inc. (NYSE:PFE) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Pfizer
How Much Debt Does Pfizer Carry?
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, it does have US$9.95b in cash offsetting this, leading to net debt of about US$58.0b.
How Strong Is Pfizer's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Pfizer had liabilities of US$43.2b due within 12 months and liabilities of US$83.7b due beyond that. On the other hand, it had cash of US$9.95b and US$17.7b worth of receivables due within a year. So its liabilities total US$99.3b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its very significant market capitalization of US$151.6b, so it does suggest shareholders should keep an eye on Pfizer's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Pfizer has net debt to EBITDA of 3.2 suggesting it uses a fair bit of leverage to boost returns. On the plus side, its EBIT was 7.1 times its interest expense, and its net debt to EBITDA, was quite high, at 3.2. The bad news is that Pfizer saw its EBIT decline by 17% over the last year. 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 Pfizer 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.