Heska (NASDAQ:HSKA) Has A Rock Solid Balance Sheet

Simply Wall St
January 09, 2022
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Heska Corporation (NASDAQ:HSKA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Heska

What Is Heska's Debt?

As you can see below, at the end of September 2021, Heska had US$99.8m of debt, up from US$51.7m a year ago. Click the image for more detail. But on the other hand it also has US$222.9m in cash, leading to a US$123.1m net cash position.

NasdaqCM:HSKA Debt to Equity History January 9th 2022

How Healthy Is Heska's Balance Sheet?

The latest balance sheet data shows that Heska had liabilities of US$37.9m due within a year, and liabilities of US$124.4m falling due after that. On the other hand, it had cash of US$222.9m and US$32.4m worth of receivables due within a year. So it can boast US$92.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Heska could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Heska has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Heska turned things around in the last 12 months, delivering and EBIT of US$7.3m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Heska'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Heska has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Heska actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Heska has net cash of US$123.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 157% of that EBIT to free cash flow, bringing in US$12m. So is Heska's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Heska is showing 3 warning signs in our investment analysis , you should know about...

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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