Bausch Health Companies Corporate Bonds and Leverage Analysis
| BHC Stock | USD 7.70 0.16 2.12% |
Bausch Health's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Bausch Health's financial risk is the risk to Bausch Health stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
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Given the importance of Bausch Health's capital structure, the first step in the capital decision process is for the management of Bausch Health to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of Bausch Health Companies to issue bonds at a reasonable cost.
Bausch Health Companies Debt to Cash Allocation
As Bausch Health Companies follows its natural business cycle, the capital allocation decisions will not magically go away. Bausch Health's decision-makers have to determine if most of the cash flows will be poured back into or reinvested in the business, reserved for other projects beyond operational needs, or paid back to stakeholders and investors.
Bausch Health Companies has 2.67 B in debt. Bausch Health Companies has a current ratio of 1.03, demonstrating that it is in a questionable position to pay out its financial commitments when the payables are due. Note however, debt could still be an excellent tool for Bausch to invest in growth at high rates of return. Bausch Health Assets Financed by Debt
Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the Bausch Health's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Bausch Health, which in turn will lower the firm's financial flexibility.Bausch Health Corporate Bonds Issued
Most Bausch bonds can be classified according to their maturity, which is the date when Bausch Health Companies has to pay back the principal to investors. Maturities can be short-term, medium-term, or long-term (more than ten years). Longer-term bonds usually offer higher interest rates but may entail additional risks.
Understaning Bausch Health Use of Financial Leverage
Bausch Health's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Bausch Health's total debt position, including all outstanding debt obligations, and compares it with Bausch Health's equity. Financial leverage can amplify the potential profits to Bausch Health's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Bausch Health is unable to cover its debt costs.
Bausch Health Companies Inc., together with its subsidiaries, develops, manufactures, and markets a range of pharmaceutical, medical device, and over-the-counter products primarily in the therapeutic areas of eye health, gastroenterology, and dermatology. Bausch Health Companies Inc. is headquartered in Laval, Canada. Bausch Health is traded on New York Stock Exchange in the United States. Please read more on our technical analysis page.
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Is Pharmaceuticals space expected to grow? Or is there an opportunity to expand the business' product line in the future? Factors like these will boost the valuation of Bausch Health. If investors know Bausch will grow in the future, the company's valuation will be higher. The financial industry is built on trying to define current growth potential and future valuation accurately. All the valuation information about Bausch Health listed above have to be considered, but the key to understanding future value is determining which factors weigh more heavily than others.
The market value of Bausch Health Companies is measured differently than its book value, which is the value of Bausch that is recorded on the company's balance sheet. Investors also form their own opinion of Bausch Health's value that differs from its market value or its book value, called intrinsic value, which is Bausch Health's true underlying value. Investors use various methods to calculate intrinsic value and buy a stock when its market value falls below its intrinsic value. Because Bausch Health's market value can be influenced by many factors that don't directly affect Bausch Health's underlying business (such as a pandemic or basic market pessimism), market value can vary widely from intrinsic value.
Please note, there is a significant difference between Bausch Health's value and its price as these two are different measures arrived at by different means. Investors typically determine if Bausch Health is a good investment by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, Bausch Health's price is the amount at which it trades on the open market and represents the number that a seller and buyer find agreeable to each party.
What is Financial Leverage?
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.Leverage and Capital Costs
The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.Benefits of Financial Leverage
Leverage provides the following benefits for companies:- Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
- It provides a variety of financing sources by which the firm can achieve its target earnings.
- Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.