Is Heska (NASDAQ:HSKA) A Risky Investment?

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. Importantly, Heska Corporation (NASDAQ:HSKA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Heska

How Much Debt Does Heska Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Heska had debt of US$83.9m, up from US$50.0m in one year. However, it does have US$245.2m in cash offsetting this, leading to net cash of US$161.2m.

How Healthy Is Heska's Balance Sheet?

We can see from the most recent balance sheet that Heska had liabilities of US$41.5m falling due within a year, and liabilities of US$104.1m due beyond that. Offsetting these obligations, it had cash of US$245.2m as well as receivables valued at US$34.7m due within 12 months. So it actually has US$134.2m 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.

Notably, Heska made a loss at the EBIT level, last year, but improved that to positive EBIT of US$5.1m in the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last year, Heska actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Heska has US$161.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 365% of that EBIT to free cash flow, bringing in US$19m. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Heska that you should be aware of.

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.

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.

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