When it comes to investing in stocks, understanding the level of debt a company holds is crucial in assessing risk. Debt can be a double-edged sword, as it can fuel growth but also bring potential risks. One such company that carries a significant amount of debt is Gilead Sciences, Inc. (NASDAQ:GILD), a leading pharmaceutical company known for its groundbreaking innovations in the field of healthcare.
Debt becomes a concern when a company struggles to repay it, either through generating new capital or free cash flow. In extreme cases, lenders may take control of the business, leading to a dilution of the shareholders’ value. However, not all debt is detrimental. Companies often take on debt to finance growth and expansion without facing any negative consequences.
Analyzing Gilead Sciences’ financials, we find that the company had a total debt of US$25.0 billion in September 2023, similar to the previous year. On the positive side, it also had a substantial cash reserve of US$7.97 billion, resulting in a net debt of US$17.0 billion. This indicates that Gilead Sciences has some flexibility and a strong balance sheet to manage its debt obligations effectively.
To further evaluate the health of Gilead Sciences’ balance sheet, we examine its liabilities and assets. The company reported liabilities of US$11.9 billion due within 12 months and US$28.2 billion due beyond 12 months. Offsetting these obligations, it had cash reserves of US$7.97 billion and short-term receivables valued at US$4.79 billion. While the total liabilities exceed the combination of its cash and receivables, Gilead Sciences’ significant market capitalization of US$94.0 billion provides it with the potential to strengthen its balance sheet through capital raising if necessary.
When determining the impact of debt on a company’s earnings power, we consider its net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA). In the case of Gilead Sciences, its net debt is only 1.4 times its EBITDA, indicating a conservative use of debt. Furthermore, its EBIT comfortably covers its interest expense, being 10.0 times the size. However, the company experienced a 19% decline in EBIT over the past year, which could pose challenges if the trend continues.
While a company’s balance sheet is an important factor in analyzing debt, future profitability is crucial in determining its ability to strengthen the balance sheet over time. Gilead Sciences’ steady free cash flow, which equated to 78% of its EBIT over the last three years, positions the company well to pay down debt when necessary.
In conclusion, Gilead Sciences’ debt level should be carefully considered by investors. While the company demonstrates a conservative approach to debt management and has the potential to strengthen its balance sheet, it is important to monitor the company’s future profitability and the overall landscape of the pharmaceutical industry. As with any investment decision, assessing the associated risks is essential to informed investing.
Frequently Asked Questions (FAQ)
Q: Is Gilead Sciences a high-risk investment due to its debt?
A: While Gilead Sciences does carry a significant amount of debt, its strong balance sheet, substantial cash reserves, and conservative use of debt suggest that it is not an excessively high-risk investment.
Q: How does Gilead Sciences manage its debt obligations?
A: Gilead Sciences has demonstrated a steady ability to generate free cash flow, which provides it with the capacity to pay down debt when appropriate. Additionally, the company has the potential to strengthen its balance sheet through capital raising if necessary.
Q: What impact does debt have on Gilead Sciences’ earnings power?
A: Gilead Sciences’ net debt is only 1.4 times its EBITDA, indicating a conservative use of debt. Furthermore, its EBIT comfortably covers its interest expense, indicating a strong financial position.
Q: Should investors be concerned about Gilead Sciences’ declining EBIT?
A: While Gilead Sciences experienced a decline in EBIT over the past year, it is important to monitor the company’s future profitability. The overall landscape of the pharmaceutical industry and Gilead Sciences’ ability to adapt and innovate will play a significant role in determining its success.
(Source: Simply Wall St)