Mithra Pharmaceuticals (EBR:MITRA) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Mithra Pharmaceuticals SA (EBR:MITRA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mithra Pharmaceuticals

What Is Mithra Pharmaceuticals's Net Debt?

As you can see below, at the end of June 2021, Mithra Pharmaceuticals had €263.1m of debt, up from €157.1m a year ago. Click the image for more detail. However, it also had €55.8m in cash, and so its net debt is €207.3m.

How Strong Is Mithra Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Mithra Pharmaceuticals had liabilities of €47.1m due within a year, and liabilities of €291.4m falling due after that. Offsetting these obligations, it had cash of €55.8m as well as receivables valued at €24.9m due within 12 months. So it has liabilities totalling €257.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mithra Pharmaceuticals has a market capitalization of €892.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Mithra Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 77%, to €19m. 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 €87m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €91m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Mithra Pharmaceuticals .

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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