Rock star Growth Puts Zealand Pharma (CPH:ZEAL) In A Position To Use Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Zealand Pharma A/S (CPH:ZEAL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zealand Pharma

What Is Zealand Pharma's Net Debt?

As you can see below, at the end of June 2024, Zealand Pharma had kr.276.8m of debt, up from none a year ago. Click the image for more detail. However, it does have kr.8.93b in cash offsetting this, leading to net cash of kr.8.66b.

A Look At Zealand Pharma's Liabilities

Zooming in on the latest balance sheet data, we can see that Zealand Pharma had liabilities of kr.257.2m due within 12 months and liabilities of kr.502.4m due beyond that. On the other hand, it had cash of kr.8.93b and kr.118.2m worth of receivables due within a year. So it can boast kr.8.29b more liquid assets than total liabilities.

This short term liquidity is a sign that Zealand Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zealand Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zealand 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, Zealand Pharma reported revenue of kr.368m, which is a gain of 301%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Zealand Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Zealand Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr.538m and booked a kr.712m accounting loss. But the saving grace is the kr.8.66b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Zealand Pharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example, we've discovered 4 warning signs for Zealand 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.