Medartis Holding (VTX:MED) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Medartis Holding AG (VTX:MED) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Medartis Holding

What Is Medartis Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Medartis Holding had CHF7.21m of debt in June 2024, down from CHF27.4m, one year before. However, its balance sheet shows it holds CHF127.1m in cash, so it actually has CHF119.9m net cash.

How Healthy Is Medartis Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Medartis Holding had liabilities of CHF57.1m due within 12 months and liabilities of CHF134.8m due beyond that. Offsetting this, it had CHF127.1m in cash and CHF50.0m in receivables that were due within 12 months. So its liabilities total CHF14.8m more than the combination of its cash and short-term receivables.

Given Medartis Holding has a market capitalization of CHF709.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Medartis Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Medartis Holding made a loss at the EBIT level, last year, it was also good to see that it generated CHF12m 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 Medartis Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Medartis Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Medartis Holding actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Medartis Holding has CHF119.9m in net cash. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in CHF15m. So we don't think Medartis Holding's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Medartis Holding you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.