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.’ 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. As with many other companies Harrow Health, Inc. (NASDAQ:HROW) makes use of debt. But is this debt a concern to shareholders?
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. 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 step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Harrow Health Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Harrow Health had debt of US$71.3m, up from US$17.5m in one year. However, its balance sheet shows it holds US$84.9m in cash, so it actually has US$13.7m net cash.
NasdaqGM:HROW Debt to Equity History November 8th 2021
How Strong Is Harrow Health’s Balance Sheet?
The latest balance sheet data shows that Harrow Health had liabilities of US$8.14m due within a year, and liabilities of US$76.0m falling due after that. Offsetting this, it had US$84.9m in cash and US$3.71m in receivables that were due within 12 months. So it can boast US$4.53m more liquid assets than total liabilities.
This state of affairs indicates that Harrow Health’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$319.2m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Simply put, the fact that Harrow Health has more cash than debt is arguably a good indication that it can manage its debt safely.
We also note that Harrow Health improved its EBIT from a last year’s loss to a positive US$11m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Harrow Health can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Harrow Health has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent year, Harrow Health recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Harrow Health has net cash of US$13.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in US$9.0m. So we don’t think Harrow Health’s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example, we’ve discovered 4 warning signs for Harrow Health (1 is a bit concerning!) that you should be aware of before investing here.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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