We Think Pharma Equity Group (CPH:PEG) Has A Fair Chunk Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Pharma Equity Group A/S (CPH:PEG) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Pharma Equity Group Carry?

The image below, which you can click on for greater detail, shows that Pharma Equity Group had debt of kr.10.8m at the end of December 2024, a reduction from kr.29.8m over a year. However, because it has a cash reserve of kr.4.23m, its net debt is less, at about kr.6.58m.

How Healthy Is Pharma Equity Group's Balance Sheet?

We can see from the most recent balance sheet that Pharma Equity Group had liabilities of kr.8.63m falling due within a year, and liabilities of kr.8.10m due beyond that. On the other hand, it had cash of kr.4.23m and kr.60.3m worth of receivables due within a year. So it actually has kr.47.8m more liquid assets than total liabilities.

This surplus strongly suggests that Pharma Equity Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. There's no doubt that we learn most about debt from the balance sheet. But it is Pharma Equity Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Check out our latest analysis for Pharma Equity Group

It seems likely shareholders hope that Pharma Equity Group can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, Pharma Equity Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr.21m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. We've identified 5 warning signs with Pharma Equity Group (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.