Is Vifor Pharma (VTX:VIFN) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Vifor Pharma AG (VTX:VIFN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vifor Pharma

What Is Vifor Pharma's Net Debt?

The chart below, which you can click on for greater detail, shows that Vifor Pharma had CHF550.2m in debt in June 2021; about the same as the year before. But it also has CHF626.2m in cash to offset that, meaning it has CHF76.0m net cash.

A Look At Vifor Pharma's Liabilities

According to the last reported balance sheet, Vifor Pharma had liabilities of CHF530.8m due within 12 months, and liabilities of CHF622.4m due beyond 12 months. On the other hand, it had cash of CHF626.2m and CHF515.7m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Vifor Pharma'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 CHF8.41b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Vifor Pharma also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Vifor Pharma grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vifor Pharma 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vifor Pharma 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 most recent three years, Vifor Pharma recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Vifor Pharma's liabilities, but we can be reassured by the fact it has has net cash of CHF76.0m. And it impressed us with its EBIT growth of 58% over the last year. So we don't think Vifor Pharma's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Vifor Pharma, you may well want to click here to check an interactive graph of its earnings per share history.

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.
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