Does PharmaEssentia (TWSE:6446) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that PharmaEssentia Corporation (TWSE:6446) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PharmaEssentia

What Is PharmaEssentia's Debt?

You can click the graphic below for the historical numbers, but it shows that PharmaEssentia had NT$65.8m of debt in September 2024, down from NT$98.1m, one year before. However, it does have NT$20.8b in cash offsetting this, leading to net cash of NT$20.8b.

A Look At PharmaEssentia's Liabilities

Zooming in on the latest balance sheet data, we can see that PharmaEssentia had liabilities of NT$2.01b due within 12 months and liabilities of NT$1.05b due beyond that. On the other hand, it had cash of NT$20.8b and NT$2.32b worth of receivables due within a year. So it actually has NT$20.1b 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. Succinctly put, PharmaEssentia boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, PharmaEssentia turned things around in the last 12 months, delivering and EBIT of NT$1.1b. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PharmaEssentia can strengthen its balance sheet over time. 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. PharmaEssentia 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. Looking at the most recent year, PharmaEssentia recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case PharmaEssentia has NT$20.8b in net cash and a decent-looking balance sheet. So we are not troubled with PharmaEssentia's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that PharmaEssentia is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.