AstraZeneca (LSE: AZN) (NYSE: AZN.US) shareholders have enjoyed bumper returns over the last year, as the firm’s shares have risen by 31% during a period when the FTSE 100 has only gained 2.7%.
However, Astra’s pipeline of new, market-ready products continues to look uncomfortably bare, despite some progress with new partnerships and acquisitions.
Can Astra ride out this lean patch without being forced to cut its dividend? I’ve been taking a closer look at some of the firm’s key financial ratios to find out.
1. Operating profit/interest
What we’re looking for here is a ratio of at least 1.5, to show that AstraZeneca’s earnings cover its interest payments with room to spare:
Operating profit / net finance expense
$3,712m / $445m = 8.3 times cover
AstraZeneca has very low levels of debt, and its interest payments were covered a generous 8.3 times by reported earnings last year. It’s clear that Astra has plenty of headroom to cope if debt costs rise, and the risk of problem seems very low.
2. Debt/equity ratio
Commonly referred to as gearing, this is simply the ratio of debt to shareholder equity, or book value (total assets — total liabilities). I tend to use net debt, as companies often maintain large cash balances that can be used to reduce debt if necessary.
AstraZeneca’s net debt is just $1.1bn, while its equity is $23.2bn, giving net gearing of 5%, which is very unlikely to cause any problems, even if the firm’s profits continue to fall.
3. Operating profit/sales
This ratio is usually known as operating margin and is useful measure of a company’s profitability.
Astra’s reported operating margin in 2013 was 14.4%, but if I ignore intangible impairments — which have no cash impact — then the firm’s 2013 operating margin was a more impressive 21%.
Is Astra a buy?
I’m confident that AstraZeneca is a pretty safe buy, as its low gearing and strong profit margins means that any serious financial problems are very unlikely. Astra’s dividend was covered 1.3 times by free cash flow last year, and the firm’s 4.2% yield should be safe in 2014.
The risk for investors is that Astra’s profits will fall further than expected before new drugs — as yet uncertain — replace the profits lost by older products which have fallen off the patent cliff and are now being replaced by cheaper generic drugs.
