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.' 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. We note that PharmaEssentia Corporation (GTSM:6446) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is PharmaEssentia's Net Debt?
You can click the graphic below for the historical numbers, but it shows that PharmaEssentia had NT$81.2m of debt in September 2020, down from NT$95.6m, one year before. However, it does have NT$4.23b in cash offsetting this, leading to net cash of NT$4.15b.
How Healthy Is PharmaEssentia's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that PharmaEssentia had liabilities of NT$897.8m due within 12 months and liabilities of NT$496.5m due beyond that. On the other hand, it had cash of NT$4.23b and NT$320.4m worth of receivables due within a year. So it can boast NT$3.16b more liquid assets than total liabilities.
This short term liquidity is a sign that PharmaEssentia could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PharmaEssentia has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine PharmaEssentia'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.
In the last year PharmaEssentia wasn't profitable at an EBIT level, but managed to grow its revenue by 251%, to NT$464m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is PharmaEssentia?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year PharmaEssentia had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$1.3b of cash and made a loss of NT$1.2b. However, it has net cash of NT$4.15b, so it has a bit of time before it will need more capital. Importantly, PharmaEssentia's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 PharmaEssentia that you should be aware of before investing here.
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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