Understanding Leverage for Abbott Laboratories
By Mike BensonUpdated
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.
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:
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.
