AstraZeneca Plc is financed through a combination of equity and debt. It’s 2011 financial returns showed that it has total assets of $52.830 billion, compared to total liabilities of $29.358 billion. Thus amounting to net assets of $23.472 billion. Her balance sheet also indicates that the bulk of her liabilities are in the form of interest bearing loans (both short and long term), accounts payable, and tax liabilities.
Over 90% of its interest bearing loans is non-current loans due over a year, while it’s total equity is comprised of $3.078 billion of share premium, and $17.984 billion in retained earnings. Retained earnings therefore amount for 76% of the company’s existing total equity. 54% of its debts are in the form of short-term liabilities (payments due within 12 months), while 46% are due over a year (long term liabilities). The bulk of AstraZeneca’s long-term liabilities (54%) are in the form of interest bearing loans and borrowings. According to Brigham and Ehrhardt (2010), long term loans are essential for organizations seeking to invest in capital projects, and could appropriately gear an organization towards growth, however they have to be optimal, to avoid the risk of high interest rate repayments.
Gearing (Debt to Equity ratio) is used as a measure of determining how an organization finances its operations. This could be either through the use of equity (shareholders) or debt (bank and bonds) – Brigham and Ehrhardt (2010). Debt to Equity ratio is calculated as a percentage of the company’s long-term liabilities against its equity capital (Investopedia, 2012). Based on AstraZeneca’s figures, it has a gearing of 58%, as calculated in the table below:
Long Term Liabilities$13.606 billion Total Equity$23.472 billion Gearing %58%Long-term liabilities have been utilized in this calculation, as a bulk of the organisation’s short term liabilities are in the form of trade and other receivables, which are not necessarily considered financing options (Investopedia, 2012). According to Brigham and Ehrhardt (2010), an optimum gearing percentage is 50%, and companies with a higher percentage are usually regarded as “being aggressive in their long term financing”. AstraZeneca is 58% leveraged, so it can be assumed that the organization is using debt aggressively to finance its operations.
Based on the charts below, it can be seen that AstraZeneca’s financing options has changed considerably over the past 7 years. The use of long-term debt as a source of financing has increased exponentially from $2.621 billion in 2003 to a high of $17 billion 2007, and most recently been on the decline to $13 billion. Total equity has also rise over the same period but not as high as long term debt.
The financing options have been determined by calculating the leveraging percentage for each of the financial years from 2003 to 2011. The leveraging percentage for AstraZeneca has increased in line with the use of debt financing, and this has risen from 19.77% in 2003 to 58% in 2011. The results show that AstraZeneca is increasingly relying on debt as a form of financing, and is riskier for investors seeking to invest. However it has taken steps over the past 5 years to reduce its exposure to debt financing. This could be as a result of the financial crisis. The level of risk that could be attributable to this percentage can only be determined by assessing its leverage (and other financial ratios) against that of competitors in the industry to ascertain whether it is of an optimal standard or not.
Overall, AstraZeneca seems to be increasingly financed by debt and this has risen over the past 7 years.
ReferencesAstraZeneca (2012) Annual Reports, www.astrazeneca.com, accessed: 07/05/2012
Brigham, E. F., and Ehrhardt, M. C. (2010) Financial Management Theory and Practice, Cengage Learning, 1184pp
Investopedia (2012) Leveraging Ratio, www.investopedia.com, accessed: 07/05/2012
