These 4 Measures Indicate That Medartis Holding (VTX:MED) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Medartis Holding AG (VTX:MED) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Medartis Holding's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Medartis Holding had debt of CHF121.2m, up from CHF462.0k in one year. But it also has CHF138.7m in cash to offset that, meaning it has CHF17.5m net cash.

How Strong Is Medartis Holding's Balance Sheet?

The latest balance sheet data shows that Medartis Holding had liabilities of CHF51.0m due within a year, and liabilities of CHF139.3m falling due after that. Offsetting these obligations, it had cash of CHF138.7m as well as receivables valued at CHF46.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF4.74m.

This state of affairs indicates that Medartis Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CHF1.03b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

View our latest analysis for Medartis Holding

Importantly, Medartis Holding's EBIT fell a jaw-dropping 37% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Medartis Holding 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Medartis Holding 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 two years, Medartis Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Medartis Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF17.5m. And it impressed us with free cash flow of CHF21m, being 119% of its EBIT. So we don't have any problem with Medartis Holding's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Medartis Holding that you should be aware of before investing here.

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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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.