Here's Why Mithra Pharmaceuticals (EBR:MITRA) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mithra Pharmaceuticals SA (EBR:MITRA) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mithra Pharmaceuticals

What Is Mithra Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Mithra Pharmaceuticals had €277.0m of debt, an increase on €145.9m, over one year. On the flip side, it has €138.7m in cash leading to net debt of about €138.4m.

How Healthy Is Mithra Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Mithra Pharmaceuticals had liabilities of €70.7m due within a year, and liabilities of €293.5m falling due after that. Offsetting these obligations, it had cash of €138.7m as well as receivables valued at €59.1m due within 12 months. So it has liabilities totalling €166.4m more than its cash and near-term receivables, combined.

Given Mithra Pharmaceuticals has a market capitalization of €1.02b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mithra Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Mithra Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to €9.0m, which is a fall of 91%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Mithra Pharmaceuticals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €84m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €96m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Mithra Pharmaceuticals you should know about.

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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