Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Harrow Health, Inc. (NASDAQ:HROW) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Harrow Health's Net Debt?
The chart below, which you can click on for greater detail, shows that Harrow Health had US$14.0m in debt in December 2019; about the same as the year before. But on the other hand it also has US$30.1m in cash, leading to a US$16.1m net cash position.
How Healthy Is Harrow Health's Balance Sheet?
According to the last reported balance sheet, Harrow Health had liabilities of US$12.3m due within 12 months, and liabilities of US$19.4m due beyond 12 months. Offsetting these obligations, it had cash of US$30.1m as well as receivables valued at US$2.73m due within 12 months. So it can boast US$1.12m 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$110.4m 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Harrow Health's ability to maintain a healthy balance sheet going forward. 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$51m, which is a gain of 24%, 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$168k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 24% is a good sign. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Harrow Health (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
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.
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