Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Harrow Health, Inc. (NASDAQ:HROW) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Harrow Health's Debt?
As you can see below, Harrow Health had US$13.7m of debt at June 2019, down from US$15.3m a year prior. However, it does have US$31.8m in cash offsetting this, leading to net cash of US$18.0m.
A Look At Harrow Health's Liabilities
According to the last reported balance sheet, Harrow Health had liabilities of US$9.86m due within 12 months, and liabilities of US$20.3m due beyond 12 months. Offsetting this, it had US$31.8m in cash and US$2.99m in receivables that were due within 12 months. So it actually has US$4.61m more liquid assets than total liabilities.
This surplus suggests that Harrow Health has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Harrow Health boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Harrow Health can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Harrow Health reported revenue of US$48m, which is a gain of 45%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Harrow Health?
Although Harrow Health had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of US$25m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 45% is a good sign. We'd see further strong growth as an optimistic indication. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Harrow Health's profit, revenue, and operating cashflow have changed over the last few years.
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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