Zealand Pharma (CPH:ZEAL) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Zealand Pharma A/S (CPH:ZEAL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Zealand Pharma Carry?

The image below, which you can click on for greater detail, shows that at September 2025 Zealand Pharma had debt of kr.298.5m, up from kr.281.0m in one year. But on the other hand it also has kr.16.2b in cash, leading to a kr.15.9b net cash position.

How Strong Is Zealand Pharma's Balance Sheet?

According to the last reported balance sheet, Zealand Pharma had liabilities of kr.1.18b due within 12 months, and liabilities of kr.456.1m due beyond 12 months. Offsetting these obligations, it had cash of kr.16.2b as well as receivables valued at kr.451.6m due within 12 months. So it actually has kr.15.0b more liquid assets than total liabilities.

This luscious liquidity implies that Zealand Pharma's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Zealand Pharma has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Zealand Pharma

Although Zealand Pharma made a loss at the EBIT level, last year, it was also good to see that it generated kr.7.1b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zealand Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zealand Pharma 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. Over the last year, Zealand Pharma actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zealand Pharma has kr.15.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of kr.7.4b, being 104% of its EBIT. So we don't think Zealand Pharma's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Zealand Pharma (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.