Does Pharma Mar (BME:PHM) Have A Healthy Balance Sheet?

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.' 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 Mar, S.A. (BME:PHM) makes use of debt. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pharma Mar

What Is Pharma Mar's Debt?

The image below, which you can click on for greater detail, shows that Pharma Mar had debt of €43.6m at the end of March 2022, a reduction from €50.4m over a year. But it also has €221.6m in cash to offset that, meaning it has €178.0m net cash.

A Look At Pharma Mar's Liabilities

According to the last reported balance sheet, Pharma Mar had liabilities of €80.6m due within 12 months, and liabilities of €95.6m due beyond 12 months. Offsetting these obligations, it had cash of €221.6m as well as receivables valued at €30.8m due within 12 months. So it can boast €76.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Pharma Mar could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pharma Mar boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Pharma Mar's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Pharma Mar 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 Pharma Mar 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, Pharma Mar 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

While it is always sensible to investigate a company's debt, in this case Pharma Mar has €178.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €40m, being 123% of its EBIT. So we don't think Pharma Mar's use of debt is risky. 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 1 warning sign with Pharma Mar , 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.