We Think Pharma Mar (BME:PHM) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Pharma Mar, S.A. (BME:PHM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pharma Mar

How Much Debt Does Pharma Mar Carry?

The image below, which you can click on for greater detail, shows that Pharma Mar had debt of €41.0m at the end of June 2022, a reduction from €53.3m over a year. But on the other hand it also has €196.7m in cash, leading to a €155.7m net cash position.

A Look At Pharma Mar's Liabilities

According to the last reported balance sheet, Pharma Mar had liabilities of €96.1m due within 12 months, and liabilities of €87.7m due beyond 12 months. On the other hand, it had cash of €196.7m and €32.3m worth of receivables due within a year. So it actually has €45.2m 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. Simply put, the fact that Pharma Mar has more cash than debt is arguably a good indication that it can manage its debt safely.

While Pharma Mar doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. 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, 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. Happily for any shareholders, Pharma Mar actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pharma Mar has net cash of €155.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €41m, being 117% of its EBIT. So is Pharma Mar's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pharma Mar is showing 1 warning sign in our investment analysis , you should know about...

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.