Is H. Lundbeck (CPH:HLUN B) A Risky Investment?

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 note that H. Lundbeck A/S (CPH:HLUN B) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for H. Lundbeck

What Is H. Lundbeck's Net Debt?

As you can see below, H. Lundbeck had kr.3.72b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr.8.32b in cash offsetting this, leading to net cash of kr.4.60b.

How Strong Is H. Lundbeck's Balance Sheet?

We can see from the most recent balance sheet that H. Lundbeck had liabilities of kr.7.78b falling due within a year, and liabilities of kr.7.91b due beyond that. Offsetting this, it had kr.8.32b in cash and kr.4.32b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.3.04b.

Since publicly traded H. Lundbeck shares are worth a total of kr.39.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, H. Lundbeck also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, H. Lundbeck grew its EBIT by 3.1% in the last year, making that debt load look even more manageable. 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 H. Lundbeck'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. H. Lundbeck 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. Happily for any shareholders, H. Lundbeck actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about H. Lundbeck's liabilities, but we can be reassured by the fact it has has net cash of kr.4.60b. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in kr.4.9b. So we don't think H. Lundbeck's use of debt is risky. Another factor that would give us confidence in H. Lundbeck would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.