Does Elanco Animal Health (NYSE: ELAN) have a healthy track record?
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Elanco Animal Health Incorporated (NYSE: ELAN) uses debt in its business. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both cash and debt levels.
Check out our latest review for Elanco Animal Health
What is Elanco Animal Health’s net debt?
As you can see below, at the end of March 2021 Elanco Animal Health was in debt of $ 6.00 billion, up from $ 2.11 billion a year ago. Click on the image for more details. However, it has $ 515.0 million in cash offsetting that, leading to net debt of around $ 5.48 billion.
A look at the responsibilities of Elanco Animal Health
The latest balance sheet data shows that Elanco Animal Health had liabilities of US $ 2.03 billion due within one year, and liabilities of US $ 6.95 billion due thereafter. On the other hand, he had cash of US $ 515.0 million and receivables of US $ 1.13 billion within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 7.33 billion.
This deficit is not that big as Elanco Animal Health is worth US $ 16.4 billion and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Elanco Animal Health shareholders face the double whammy of a high net debt / EBITDA ratio (8.1) and fairly low interest coverage, since EBIT is only 0.40 times interest charges. This means that we consider him to be in heavy debt. Worse yet, Elanco Animal Health’s EBIT was down 74% from last year. If the income continues like this for the long haul, there is an incredible chance to pay off that debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Elanco Animal Health can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Elanco Animal Health has recorded total negative free cash flow. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
Our point of view
To be frank, Elanco Animal Health’s interest coverage and track record of (not) growing its EBIT makes us rather uncomfortable with its debt levels. That said, his ability to manage his total liabilities isn’t that much of a concern. We’re pretty clear that we consider Elanco Animal Health to be really quite risky, because of the health of its track record. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Be aware that Elanco Animal Health shows 1 warning sign in our investment analysis , you must know…
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth stocks today.
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