Pharma Mar (BME:PHM) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Pharma Mar, S.A. (BME:PHM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Pharma Mar

What Is Pharma Mar's Net Debt?

The image below, which you can click on for greater detail, shows that Pharma Mar had debt of €50.4m at the end of March 2021, a reduction from €60.6m over a year. But it also has €210.1m in cash to offset that, meaning it has €159.7m net cash.

How Strong Is Pharma Mar's Balance Sheet?

According to the last reported balance sheet, Pharma Mar had liabilities of €83.8m due within 12 months, and liabilities of €133.8m due beyond 12 months. Offsetting these obligations, it had cash of €210.1m as well as receivables valued at €26.9m due within 12 months. So it actually has €19.3m more liquid assets than total liabilities.

Having regard to Pharma Mar's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.54b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Pharma Mar boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Pharma Mar has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 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 €159.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €113m, being 165% 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.

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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