View our latest analysis for Pharma Mar
By Simply Wall St Published November 19, 2020 .
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Pharma Mar's Net Debt?
As you can see below, Pharma Mar had €56.9m of debt at September 2020, down from €85.6m a year prior. However, it does have €197.2m in cash offsetting this, leading to net cash of €140.3m.
How Strong Is Pharma Mar's Balance Sheet?
According to the last reported balance sheet, Pharma Mar had liabilities of €105.7m due within 12 months, and liabilities of €125.9m due beyond 12 months. Offsetting these obligations, it had cash of €197.2m as well as receivables valued at €27.5m due within 12 months. So it has liabilities totalling €6.88m more than its cash and near-term receivables, combined.
Having regard to Pharma Mar's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.71b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Pharma Mar boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Pharma Mar made a loss at the EBIT level, last year, it was also good to see that it generated €138m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pharma Mar can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Pharma Mar may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Pharma Mar actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
We could understand if investors are concerned about Pharma Mar's liabilities, but we can be reassured by the fact it has has net cash of €140.3m. And it impressed us with free cash flow of €264m, being 191% of its EBIT. So we don't think Pharma Mar's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Pharma Mar (1 is potentially serious) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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