Is Pharming Group N.V. (AMS:PHARM) A Financially Sound Company?
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Investors are always looking for growth in small-cap stocks like Pharming Group N.V. (AMS:PHARM), with a market cap of €489m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into PHARM here.
PHARM’s Debt (And Cash Flows)
PHARM's debt levels have fallen from €82m to €73m over the last 12 months , which also accounts for long term debt. With this debt repayment, PHARM currently has €80m remaining in cash and short-term investments to keep the business going. Moreover, PHARM has produced €40m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 55%, indicating that PHARM’s operating cash is sufficient to cover its debt.
Can PHARM pay its short-term liabilities?
Looking at PHARM’s €83m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €115m, with a current ratio of 1.4x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Biotechs companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is PHARM’s debt level acceptable?
PHARM is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PHARM's case, the ratio of 2.66x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
PHARM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around PHARM's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure PHARM has company-specific issues impacting its capital structure decisions. You should continue to research Pharming Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PHARM’s future growth? Take a look at our free research report of analyst consensus for PHARM’s outlook.
Valuation: What is PHARM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PHARM is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
