Is Vifor Pharma (VTX:VIFN) Using Too Much 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Vifor Pharma AG (VTX:VIFN) makes use of debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vifor Pharma

How Much Debt Does Vifor Pharma Carry?

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. However, it does have CHF626.2m in cash offsetting this, leading to net cash of CHF76.0m.

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 these liquid assets roughly match the total liabilities.

Having regard to Vifor Pharma's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF7.02b 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. There's no doubt that we learn most about debt from the balance sheet. 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 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. While Vifor Pharma has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Vifor Pharma produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. 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 we liked the look of last year's 58% year-on-year EBIT growth. So is Vifor Pharma's debt a risk? It doesn't seem so to us. 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 Vifor Pharma's earnings per share history for free.

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.

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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