Leverage for GlaxoSmithKline


Jul. 16 2015, Updated 11:05 a.m. ET

Is GlaxoSmithKline highly levered?

GlaxoSmithKline (GSK), a British multinational pharmaceutical giant, uses both equity and debt for its working capital requirements as well as investments in business.

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Net debt to EBIDTA

Net debt to EBITDA (earnings before interest, tax, depreciation, and amortization), a measure of leverage, is calculated as a company’s interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. If a company has more cash than debt, the ratio can be negative.

The above chart shows a comparison of net debt to EBITDA for GlaxoSmithKline (GSK) and its peers, including AstraZeneca (AZN), Merck (MRK), Bristol-Myers Squibb (BMY), and Eli Lilly (LLY).

Total debt-to-equity ratio

The total debt-to-equity ratio is a measure of financial leverage, calculated as total debt liabilities divided by its shareholders’ equity. The total debt-to-equity ratio for GlaxoSmithKline is 380%, while this ratio for its peers AstraZeneca, Bristol-Myers Squibb, Eli Lilly, and Merck is 55%, 52.2%, 52.3%, and 43.8%, respectively.

This signifies that GSK uses much higher debt in terms of percentage to equity compared with its peers. This can negatively impact GSK to raise funds if needed.

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Credit ratings

GlaxoSmithKline’s long-term credit rating with Standard & Poor’s is A+, and its Moody’s rating is A2 as of December 31, 2014. This rating is considered stable by lenders. The company is rated A-1 and P-1 by Standard & Poor’s and Moody’s for short-term debt, respectively, for the same period.

Debt maturity and rate of interest

GlaxoSmithKline has a $10 billion US commercial paper program, of which $1 billion was in issue as of December 31, 2014. The weighted average interest on bank loans and overdrafts as of December 31, 2014, was 4.28%, while for commercial paper borrowings, it was 0.22%.

The company had long-term borrowings of 15.8 billion pounds (or $26.1 billion) as of December 31, 2014. Of this, 9.8 billion pounds (or $16.2 billion) will mature after more than five years. The average effective pre-swap interest rate of all notes in issue on December 31, 2014, was approximately 3.8%.

The group also has pledged investments in US Treasury notes with a par value of $105 million (67 million pounds) as security against irrevocable letters of credit issued on the group’s behalf with respect to self-insurance activity.

Investors may consider the Health Care Select Sector SPDR ETF (XLV) for diversification, as this ETF focuses on healthcare and pharmaceutical companies.


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