These 4 Measures Indicate That H. Lundbeck (CPH:HLUN B) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies H. Lundbeck A/S (CPH:HLUN B) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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.

See our latest analysis for H. Lundbeck

How Much Debt Does H. Lundbeck Carry?

As you can see below, H. Lundbeck had kr.3.72b of debt at March 2024, down from kr.4.77b a year prior. However, its balance sheet shows it holds kr.5.11b in cash, so it actually has kr.1.40b net cash.

How Strong Is H. Lundbeck's Balance Sheet?

We can see from the most recent balance sheet that H. Lundbeck had liabilities of kr.7.87b falling due within a year, and liabilities of kr.7.55b due beyond that. Offsetting these obligations, it had cash of kr.5.11b as well as receivables valued at kr.4.14b due within 12 months. So its liabilities total kr.6.16b more than the combination of its cash and short-term receivables.

Of course, H. Lundbeck has a market capitalization of kr.35.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, H. Lundbeck boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, H. Lundbeck grew its EBIT by 7.7% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if H. Lundbeck 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While H. Lundbeck 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. Over the last three years, H. Lundbeck actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although H. Lundbeck's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr.1.40b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in kr.4.1b. So we don't think H. Lundbeck's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with H. Lundbeck .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.