Health Check: How Prudently Does Apontis Pharma (ETR:APPH) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Apontis Pharma AG (ETR:APPH) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Apontis Pharma

How Much Debt Does Apontis Pharma Carry?

As you can see below, at the end of December 2023, Apontis Pharma had €6.02m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds €26.8m in cash, so it actually has €20.8m net cash.

How Healthy Is Apontis Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apontis Pharma had liabilities of €23.3m due within 12 months and liabilities of €3.88m due beyond that. Offsetting this, it had €26.8m in cash and €872.6k in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Apontis Pharma's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €68.1m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Apontis Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Apontis 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.

Over 12 months, Apontis Pharma made a loss at the EBIT level, and saw its revenue drop to €37m, which is a fall of 34%. That makes us nervous, to say the least.

So How Risky Is Apontis Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Apontis Pharma had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €16m of cash and made a loss of €11m. But at least it has €20.8m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Apontis Pharma that you should be aware of before investing here.

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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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@simplywallst.com