We Think Medartis Holding (VTX:MED) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Medartis Holding AG (VTX:MED) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Medartis Holding

What Is Medartis Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Medartis Holding had CHF20.8m in debt in June 2021; about the same as the year before. But on the other hand it also has CHF84.1m in cash, leading to a CHF63.2m net cash position.

How Strong Is Medartis Holding's Balance Sheet?

According to the last reported balance sheet, Medartis Holding had liabilities of CHF30.8m due within 12 months, and liabilities of CHF41.8m due beyond 12 months. Offsetting these obligations, it had cash of CHF84.1m as well as receivables valued at CHF32.7m due within 12 months. So it can boast CHF44.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Medartis Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Medartis Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Medartis Holding grew its EBIT by 247% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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.

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. During the last three years, Medartis Holding burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Medartis Holding has CHF63.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 247% over the last year. So we don't have any problem with Medartis Holding's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Medartis Holding's earnings per share history for free.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.