January 17, 2022

Remarkable Mate

Remarkable business & finance

Gilead Sciences (NASDAQ:GILD) Has A Rock Solid Balance Sheet

David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Gilead Sciences, Inc. (NASDAQ:GILD) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Gilead Sciences Carry?

As you can see below, Gilead Sciences had US$27.7b of debt at September 2021, down from US$29.3b a year prior. However, it does have US$6.61b in cash offsetting this, leading to net debt of about US$21.1b.

NasdaqGS:GILD Debt to Equity History November 29th 2021

How Strong Is Gilead Sciences’ Balance Sheet?

We can see from the most recent balance sheet that Gilead Sciences had liabilities of US$10.2b falling due within a year, and liabilities of US$35.4b due beyond that. Offsetting this, it had US$6.61b in cash and US$4.57b in receivables that were due within 12 months. So its liabilities total US$34.5b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Gilead Sciences has a huge market capitalization of US$88.1b, 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.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Gilead Sciences has a low net debt to EBITDA ratio of only 1.4. And its EBIT easily covers its interest expense, being 12.6 times the size. So we’re pretty relaxed about its super-conservative use of debt. On top of that, Gilead Sciences grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gilead Sciences’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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Gilead Sciences recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Gilead Sciences’s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that’s just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Gilead Sciences’s use of debt seems quite reasonable and we’re not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 3 warning signs for Gilead Sciences that you should be aware of before investing here.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

https://www.nasdaq.com/articles/gilead-sciences-nasdaq%3Agild-has-a-rock-solid-balance-sheet