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Understanding Leverage for Abbott Laboratories

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Abbott’s leverage

Abbott Laboratories (ABT) uses both equity and debt for its working capital requirements as well as investments in the business. Two measures of leverage considered are net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) and total debt-to-equity.

Net debt-to-EBITDA is a measure of leverage calculated by taking a company’s interest-bearing liabilities, subtracting cash or cash equivalents, and dividing that by its EBITDA. If a company has more cash than debt, the ratio can be negative.

Total debt-to-equity is a measure of financial leverage that’s calculated by dividing total debt liabilities by shareholder equity.

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Net debt-to-EBITDA

The above chart shows a comparison of the net debt-to-EBITDA for Abbott Laboratories (ABT) and its peers including Danaher (DHR), Baxter International (BAX), Stryker (SYK), and Idexx Laboratories (IDXX). Abbott has a higher net debt-to-EBITDA than Danaher and Stryker. However, its net debt-to-EBITDA is lower than Baxter International and Idexx Laboratories. This suggests that Abbott is a moderately leveraged firm compared to its peers.

Abbott has net debt of ~$3.4 billion and EBITDA of ~$4.1 billion. Also, its cash and marketable securities are lower than its total debt. This leads to a positive net debt-to-EBITDA.

Total debt-to-equity

Abbott’s total debt-to-equity ratio is 0.14x. Here’s how some of its peers compare:

  • Danaher (DHR) – 0.15x
  • Baxter International (BAX) – 1.14x
  • Stryker (SYK) – 0.46x

This shows that Abbott is using lower debt-to-equity than its peers. It suggests that Abbott isn’t too aggressive to finance its growth using debt.

Credit ratings

As of December 31, 2014, Moody’s long-term credit rating was A1 with a stable outlook. Standard & Poor’s long-term credit rating was A+ with a stable outlook.

For risk diversification, investors can consider the Health Care Select Sector SPDR ETF (XLV). XLV is focused on healthcare and pharmaceutical companies.

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