Is Heidelberg Pharma (ETR:HPHA) A Risky Investment?

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 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. We can see that Heidelberg Pharma AG (ETR:HPHA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Heidelberg Pharma

What Is Heidelberg Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Heidelberg Pharma had €5.55m of debt in August 2023, down from €15.6m, one year before. However, it does have €50.7m in cash offsetting this, leading to net cash of €45.1m.

A Look At Heidelberg Pharma's Liabilities

The latest balance sheet data shows that Heidelberg Pharma had liabilities of €20.4m due within a year, and liabilities of €2.43m falling due after that. On the other hand, it had cash of €50.7m and €1.06m worth of receivables due within a year. So it actually has €28.9m more liquid assets than total liabilities.

This excess liquidity suggests that Heidelberg Pharma is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Heidelberg Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Heidelberg Pharma can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Heidelberg Pharma made a loss at the EBIT level, and saw its revenue drop to €9.6m, which is a fall of 42%. To be frank that doesn't bode well.

So How Risky Is Heidelberg Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Heidelberg Pharma had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €35m of cash and made a loss of €22m. However, it has net cash of €45.1m, so it has a bit of time before it will need more capital. 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 instance, we've identified 2 warning signs for Heidelberg Pharma (1 is a bit unpleasant) you should be aware of.

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.