Pharmagest Interactive (EPA:PHA) Could Easily Take On More 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.' 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. We note that Pharmagest Interactive SA (EPA:PHA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Pharmagest Interactive

How Much Debt Does Pharmagest Interactive Carry?

As you can see below, Pharmagest Interactive had €59.8m of debt at June 2021, down from €75.2m a year prior. But on the other hand it also has €66.6m in cash, leading to a €6.79m net cash position.

How Strong Is Pharmagest Interactive's Balance Sheet?

The latest balance sheet data shows that Pharmagest Interactive had liabilities of €99.9m due within a year, and liabilities of €60.2m falling due after that. Offsetting these obligations, it had cash of €66.6m as well as receivables valued at €41.6m due within 12 months. So it has liabilities totalling €51.9m more than its cash and near-term receivables, combined.

Of course, Pharmagest Interactive has a market capitalization of €1.46b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Pharmagest Interactive also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Pharmagest Interactive grew its EBIT by 17% last year, making its debt load easier to handle. 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 Pharmagest Interactive's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pharmagest Interactive 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. During the last three years, Pharmagest Interactive produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Pharmagest Interactive's liabilities, but we can be reassured by the fact it has has net cash of €6.79m. And it impressed us with its EBIT growth of 17% over the last year. So is Pharmagest Interactive'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 Pharmagest Interactive is showing 1 warning sign in our investment analysis , you should know about...

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.

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.

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