Harmony Biosciences Holdings (NASDAQ:HRMY) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Harmony Biosciences Holdings

What Is Harmony Biosciences Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Harmony Biosciences Holdings had US$190.0m in debt in March 2024; about the same as the year before. However, it does have US$372.4m in cash offsetting this, leading to net cash of US$182.4m.

A Look At Harmony Biosciences Holdings' Liabilities

The latest balance sheet data shows that Harmony Biosciences Holdings had liabilities of US$154.3m due within a year, and liabilities of US$177.3m falling due after that. Offsetting these obligations, it had cash of US$372.4m as well as receivables valued at US$79.7m due within 12 months. So it can boast US$120.5m more liquid assets than total liabilities.

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

On top of that, Harmony Biosciences Holdings grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Harmony Biosciences Holdings'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 Harmony Biosciences Holdings 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, Harmony Biosciences Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Harmony Biosciences Holdings has US$182.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in US$208m. So we don't think Harmony Biosciences Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Harmony Biosciences Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com