Health Check: How Prudently Does Pharming Group (AMS:PHARM) Use Debt?

Warren Buffett famously said, '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, Pharming Group N.V. (AMS:PHARM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pharming Group

How Much Debt Does Pharming Group Carry?

As you can see below, Pharming Group had US$135.4m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$184.8m in cash, leading to a US$49.4m net cash position.

How Healthy Is Pharming Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pharming Group had liabilities of US$59.0m due within 12 months and liabilities of US$164.7m due beyond that. On the other hand, it had cash of US$184.8m and US$32.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.94m.

Having regard to Pharming Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$765.6m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Pharming Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pharming Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Pharming Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Pharming Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Pharming Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$2.8m of cash and made a loss of US$2.0m. With only US$49.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Pharming Group that you should be aware of before investing here.

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.

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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.