Is Heska (NASDAQ:HSKA) Using Debt Sensibly?
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 can see that Heska Corporation (NASDAQ:HSKA) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.
Check out our latest analysis for Heska
What Is Heska's Debt?
As you can see below, at the end of March 2022, Heska had US$100.0m of debt, up from US$84.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$172.7m in cash, so it actually has US$72.7m net cash.
How Healthy Is Heska's Balance Sheet?
According to the last reported balance sheet, Heska had liabilities of US$40.5m due within 12 months, and liabilities of US$132.5m due beyond 12 months. Offsetting these obligations, it had cash of US$172.7m as well as receivables valued at US$34.6m due within 12 months. So it actually has US$34.3m more liquid assets than total liabilities.
This surplus suggests that Heska has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Heska 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 ultimately the future profitability of the business will decide if Heska 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.
In the last year Heska wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$258m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Heska?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Heska had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$15m and booked a US$13m accounting loss. With only US$72.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Heska that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
