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Does Perrigo Company plc’s (PRGO) Debt Level Pose A Serious Problem?

With a market capitalization of USD $11.51B, Perrigo Company plc (NYSE:PRGO) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for PRGO

What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. PRGO’s debt-to-equity ratio stands at 60.43%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether PRGO’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. In PRGO’s case, its interest is excessively covered by its earnings as the ratio sits at 3.13x. Lenders may be less hesitant to lend out more funding as PRGO’s high interest coverage is seen as responsible and safe practice.

NYSE:PRGO Historical Debt Nov 9th 17

A basic way to evaluate PRGO’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses PRGO’s debt repayment capacity, which is not a big concern for a large company. In the case of PRGO, operating cash flow turned out to be 0.19x its debt level over the past twelve months. A ratio of over 0.1x shows that PRGO is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.

Are you a shareholder? PRGO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Given that PRGO’s financial situation may change, I recommend exploring market expectations for PRGO’s future growth on our free analysis platform.

Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. So, You should continue to assess PRGO’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.


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