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Is Leverage Stable for Bristol-Myers Squibb?

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Jul. 9 2015, Updated 10:05 a.m. ET

Leverage for Bristol-Myers Squibb

Bristol-Myers Squibb Company (BMY), an American multinational pharmaceutical giant, uses both equity and debt for its working capital requirements and investments in business.

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Net debt to EBITDA

Net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of leverage 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 Bristol Myers Squibb (BMY) and its peers, including AstraZeneca (AZN), Merck & Co. (MRK), GlaxoSmithKline (GSK), and Eli Lily (LLY). Bristol-Myers Squibb’s cash and marketable securities are higher than its total debt, which leads to a negative net debt to EBITDA.

Total debt to equity

Total debt to equity is a measure of financial leverage that’s calculated by dividing total debt liabilities by shareholders’ equity. Total debt-to-equity ratio for Bristol Myers Squibb is 52.2%. For peers AstraZeneca, Eli Lily, GlaxoSmithKline, and Merck & Co., it’s 55%, 52.3%, 380%, and 43.8%. This shows that BMY uses moderate debt to equity, thereby enabling the company to raise more debt if needed.

Credit ratings

As of December 31, 2014, Moody’s Investors Service’s long-term and short term credit ratings are A2 and Prime-1, respectively, with a negative outlook for long-term credit. Standard & Poor’s long-term and short-term credit ratings are A+ and A-1+, respectively, with a stable long-term credit outlook. Fitch’s long-term and short-term credit ratings are A- and F2, respectively, with a stable long-term credit outlook.

For risk diversification, investors may consider the Health Care Select Sector SPDR ETF (XLV), which focuses on healthcare and pharmaceutical companies.

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