Pharmanutra (BIT:PHN) Could Easily Take On More Debt

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.' 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. As with many other companies Pharmanutra S.p.A. (BIT:PHN) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Pharmanutra

What Is Pharmanutra's Debt?

As you can see below, at the end of September 2021, Pharmanutra had €5.80m of debt, up from €1.92m a year ago. Click the image for more detail. But it also has €27.0m in cash to offset that, meaning it has €21.2m net cash.

How Strong Is Pharmanutra's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pharmanutra had liabilities of €13.6m due within 12 months and liabilities of €8.42m due beyond that. Offsetting these obligations, it had cash of €27.0m as well as receivables valued at €19.3m due within 12 months. So it actually has €24.3m more liquid assets than total liabilities.

This surplus suggests that Pharmanutra has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pharmanutra has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Pharmanutra has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pharmanutra'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Pharmanutra 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. During the last three years, Pharmanutra produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Pharmanutra has €21.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 24% over the last year. So is Pharmanutra's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Pharmanutra's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.