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.' 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. As with many other companies Heron Therapeutics, Inc. (NASDAQ:HRTX) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Heron Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that Heron Therapeutics had US$4.82m of debt in March 2019, down from US$28.9m, one year before. But it also has US$289.2m in cash to offset that, meaning it has US$284.4m net cash.
How Strong Is Heron Therapeutics's Balance Sheet?
According to the last reported balance sheet, Heron Therapeutics had liabilities of US$92.3m due within 12 months, and liabilities of US$11.7m due beyond 12 months. Offsetting this, it had US$289.2m in cash and US$74.0m in receivables that were due within 12 months. So it can boast US$259.3m more liquid assets than total liabilities.
This excess liquidity suggests that Heron Therapeutics is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Heron Therapeutics 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 it is future earnings, more than anything, that will determine Heron Therapeutics'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.
Over 12 months, Heron Therapeutics reported revenue of US$98m, which is a gain of 152%. So there's no doubt that shareholders are cheering for growth
So How Risky Is Heron Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Heron Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$190m of cash and made a loss of US$190m. However, it has net cash of US$289m, so it has a bit of time before it will need more capital. Importantly, Heron Therapeutics's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like Heron Therapeutics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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