Here's Why Harvard Bioscience (NASDAQ:HBIO) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Harvard Bioscience, Inc. (NASDAQ:HBIO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Harvard Bioscience

What Is Harvard Bioscience's Debt?

The chart below, which you can click on for greater detail, shows that Harvard Bioscience had US$46.8m in debt in December 2022; about the same as the year before. However, it also had US$4.51m in cash, and so its net debt is US$42.3m.

How Healthy Is Harvard Bioscience's Balance Sheet?

We can see from the most recent balance sheet that Harvard Bioscience had liabilities of US$23.2m falling due within a year, and liabilities of US$49.9m due beyond that. Offsetting this, it had US$4.51m in cash and US$16.7m in receivables that were due within 12 months. So its liabilities total US$51.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Harvard Bioscience has a market capitalization of US$205.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Harvard Bioscience can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Harvard Bioscience had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to US$113m. We would much prefer see growth.

Caveat Emptor

Importantly, Harvard Bioscience had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$5.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$438k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. We've identified 1 warning sign with Harvard Bioscience , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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