Galenica (VTX: GALE) seems to be using debt quite wisely

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Galenica SA (VTX: GALE) carries a debt. But should shareholders be concerned about its use of debt?

When Is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest analysis for Galenica

What is Galenica’s debt?

As you can see below, Galenica had a debt of CHF 520.0 million, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of CHF 124.4 million, its net debt is lower, at around CHF 395.6 million.

SWX: GALE History of debt to equity 25 August 2021

A look at Galenica’s liabilities

Looking at the latest balance sheet data, we can see that Galenica had debts of CHF 753.5 million due within 12 months and debts of CHF 646.2 million due beyond. On the other hand, it had cash of CHF 124.4 million and CHF 523.7 million in receivables within one year. Its liabilities therefore exceed the sum of its cash and its (short-term) receivables by CHF 751.6 million.

This deficit is not that serious as Galenica is worth 3.55 billion francs, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

We would say that Galenica’s moderate net debt to EBITDA ratio (being 1.8) indicates debt prudence. And its high coverage interest of 39.0 times, makes us even more comfortable. Galenica increased its EBIT by 7.5% last year. It’s far from incredible, but it’s a good thing when it comes to paying down debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Galenica can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Galenica has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

Our point of view

The good news is that Galenica’s demonstrated ability to cover her interest costs with her EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. It’s also worth noting that Galenica is in the Healthcare industry, which is often seen as quite defensive. As you zoom out, Galenica appears to be using the debt quite reasonably; and that gets the nod from us. While debt comes with risk, when used wisely, it can also generate a higher return on equity. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Galenica that you need to be aware of.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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