Band Stjepan Kalinic
This article first appeared on Simply Wall St News.
After a brief escape, Merck & Co., Inc.(NYSE: MRK) failed to set a new high, rejecting the US $ 88 level set before the 2020 pandemic. As the company finalizes a US $ 11 billion takeover bid for Acceleron Pharma , we will examine the state of its balance sheet.
Discover our latest analysis for Merck.
Although history rarely repeats itself, it does rhyme. One of the notable signs of the late bull market has been high M&A activity, which only exploded in 2021.
Despite opposition from a major shareholder, Avoro Capital Advisors, Merck was able to complete a takeover bid on Acceleron Pharma (NASDAQ: XLRN) at $ 180 / share, in a transaction valued at 11 billion USD.
While not yet profitable, Acceleron has some exciting products in the pipeline, including sotatercept, a drug for the treatment of pulmonary arterial hypertension (PAH) that Merck sees as a $ 7.5 billion market. by 2026.
Meanwhile, the company received FDA approval for the anti-PD-1 treatment Keytruda as an adjunct therapy for high-risk renal cell carcinoma (RCC) patients. In the Phase 3 KEYNOTE-564 trial, the drug reduced the risk of disease recurrence or death by 32%. This development could bring in more than US $ 1 billion in new sales.
Merck Debt Review
As you can see below, Merck had $ 26.4 billion in debt in September 2021, up from $ 28.7 billion the year before. However, it has US $ 10.0 billion in cash, offsetting this, leading to net debt of around US $ 16.4 billion.
NYSE: MRK Debt to Equity History November 20, 2021
A look at Merck’s responsibilities
By checking the latest balance sheet data, we can see that Merck had a liability of US $ 23.7 billion owed within 12 months and a liability of US $ 33.9 billion owed beyond that. On the other hand, it had US $ 10.0 billion in cash and US $ 10.6 billion in receivables due within one year. It therefore has liabilities totaling US $ 37.0 billion more than its cash and short-term receivables combined. Of course, Merck has a market cap of US $ 203.8 billion, so this liability is likely manageable.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization expenses.
Merck’s net debt is only 0.78 times its EBITDA. And its EBIT covers its interest costs a whopping 23.2 times. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, Merck has increased its EBIT by 42% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Merck can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
In addition, it is worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Merck has recorded free cash flow of 53% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. These hard cash allow him to reduce his debt whenever he wants.
Merck’s impressive interest coverage means it has the upper hand over its debt. While we view aggressive M&A activity through the lens of historical risk, we are optimistic that Merck can easily afford these expansions.
And that’s just the start of good news as its EBIT growth rate is also very encouraging. Zooming out, Merck seems to be using the debt in a very reasonable way; and that gets the nod from us. While debt comes with risk, it can also generate a higher return on equity when used wisely.
When analyzing debt levels, the balance sheet is the important starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Merck you should know.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St do not have any position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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