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 the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Harrow Health’s Net Debt?
The image below, which you can click on for greater detail, shows that Harrow Health had debt of US$13.7m at the end of June 2019, a reduction from US$15.3m over a year. However, its balance sheet shows it holds US$31.8m in cash, so it actually has US$18.0m net cash.
A Look At Harrow Health’s Liabilities
Zooming in on the latest balance sheet data, we can see that Harrow Health had liabilities of US$9.86m due within 12 months and liabilities of US$20.3m due beyond that. Offsetting this, it had US$31.8m in cash and US$2.99m in receivables that were due within 12 months. So it can boast 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. Simply put, the fact that Harrow Health has more cash than debt is arguably a good indication that it can manage its debt safely. 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.
In the last year Harrow Health wasn’t profitable at an EBIT level, but managed to grow its revenue by45%, to US$48m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Harrow Health?
While Harrow Health lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper 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. Keeping in mind its 45% revenue growth over the last year, we think there’s a decent chance the company is on track. There’s no doubt fast top line growth can cure all manner of ills, for a stock. 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.
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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