In This Article:
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Pharming Group
What Is Pharming Group's Net Debt?
The image below, which you can click on for greater detail, shows that Pharming Group had debt of €54.1m at the end of September 2019, a reduction from €77.8m over a year. However, it does have €63.0m in cash offsetting this, leading to net cash of €8.88m.
How Strong Is Pharming Group's Balance Sheet?
We can see from the most recent balance sheet that Pharming Group had liabilities of €90.1m falling due within a year, and liabilities of €40.2m due beyond that. On the other hand, it had cash of €63.0m and €27.0m worth of receivables due within a year. So its liabilities total €40.4m more than the combination of its cash and short-term receivables.
Since publicly traded Pharming Group shares are worth a total of €974.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Pharming Group boasts net cash, so it's fair to say it does not have a heavy debt load!
We note that Pharming Group grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pharming Group'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.