Pharma Mar (BME:PHM) Has A Pretty Healthy Balance Sheet

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. Importantly, Pharma Mar, S.A. (BME:PHM) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pharma Mar

What Is Pharma Mar's Debt?

As you can see below, Pharma Mar had €45.6m of debt at December 2021, down from €53.0m a year prior. But on the other hand it also has €201.9m in cash, leading to a €156.3m net cash position.

How Strong Is Pharma Mar's Balance Sheet?

We can see from the most recent balance sheet that Pharma Mar had liabilities of €86.3m falling due within a year, and liabilities of €104.1m due beyond that. Offsetting these obligations, it had cash of €201.9m as well as receivables valued at €50.9m due within 12 months. So it actually has €62.3m more liquid assets than total liabilities.

This surplus suggests that Pharma Mar has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pharma Mar boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Pharma Mar's load is not too heavy, because its EBIT was down 44% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Pharma Mar'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, a company can only pay off debt with cold hard cash, not accounting profits. Pharma Mar 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. Over the last two years, Pharma Mar actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Pharma Mar has €156.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €18m, being 120% of its EBIT. So we are not troubled with Pharma Mar's debt use. 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.

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.