Basilea Pharmaceutica (VTX:BSLN) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Basilea Pharmaceutica AG (VTX:BSLN) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Basilea Pharmaceutica

How Much Debt Does Basilea Pharmaceutica Carry?

The image below, which you can click on for greater detail, shows that Basilea Pharmaceutica had debt of CHF95.9m at the end of December 2024, a reduction from CHF110.9m over a year. However, it does have CHF120.7m in cash offsetting this, leading to net cash of CHF24.8m.

How Strong Is Basilea Pharmaceutica's Balance Sheet?

According to the last reported balance sheet, Basilea Pharmaceutica had liabilities of CHF45.6m due within 12 months, and liabilities of CHF131.2m due beyond 12 months. Offsetting this, it had CHF120.7m in cash and CHF58.2m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Basilea Pharmaceutica's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CHF534.6m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Basilea Pharmaceutica boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Basilea Pharmaceutica grew its EBIT by 182% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Basilea Pharmaceutica'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Basilea Pharmaceutica 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 three years, Basilea Pharmaceutica recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Basilea Pharmaceutica has CHF24.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CHF73m. So is Basilea Pharmaceutica's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Basilea Pharmaceutica, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.