Celon Pharma (WSE:CLN) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Celon Pharma S.A. (WSE:CLN) makes use of 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Celon Pharma

How Much Debt Does Celon Pharma Carry?

As you can see below, at the end of September 2020, Celon Pharma had zł10.3m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has zł29.6m in cash, leading to a zł19.3m net cash position.

How Healthy Is Celon Pharma's Balance Sheet?

According to the last reported balance sheet, Celon Pharma had liabilities of zł48.0m due within 12 months, and liabilities of zł185.6m due beyond 12 months. On the other hand, it had cash of zł29.6m and zł45.0m worth of receivables due within a year. So its liabilities total zł159.0m more than the combination of its cash and short-term receivables.

Given Celon Pharma has a market capitalization of zł1.85b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Celon Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Celon Pharma has been able to increase its EBIT by 25% 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 Celon Pharma'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 Celon Pharma 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, Celon Pharma burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about Celon Pharma's liabilities, but we can be reassured by the fact it has has net cash of zł19.3m. And we liked the look of last year's 25% year-on-year EBIT growth. So we are not troubled with Celon Pharma's debt use. 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 Celon Pharma's earnings per share history for free.

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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