Is Vifor Pharma (VTX:VIFN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Vifor Pharma AG (VTX:VIFN) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?

As you can see below, Vifor Pharma had CHF565.5m of debt at June 2020, down from CHF591.3m a year prior. However, because it has a cash reserve of CHF304.7m, its net debt is less, at about CHF260.8m.

A Look At Vifor Pharma's Liabilities

We can see from the most recent balance sheet that Vifor Pharma had liabilities of CHF548.6m falling due within a year, and liabilities of CHF678.2m due beyond that. Offsetting this, it had CHF304.7m in cash and CHF485.7m in receivables that were due within 12 months. So it has liabilities totalling CHF436.4m more than its cash and near-term receivables, combined.

Of course, Vifor Pharma has a market capitalization of CHF8.65b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Vifor Pharma's net debt is only 0.46 times its EBITDA. And its EBIT covers its interest expense a whopping 239 times over. So we're pretty relaxed about its super-conservative use of debt. Also good is that Vifor Pharma grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vifor Pharma'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Vifor Pharma recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Vifor Pharma's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Zooming out, Vifor Pharma seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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