These 4 Measures Indicate That Harmony Biosciences Holdings (NASDAQ:HRMY) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. 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

How Much Debt Does Harmony Biosciences Holdings Carry?

As you can see below, Harmony Biosciences Holdings had US$193.6m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$353.5m in cash offsetting this, leading to net cash of US$159.9m.

How Strong Is Harmony Biosciences Holdings' Balance Sheet?

According to the last reported balance sheet, Harmony Biosciences Holdings had liabilities of US$163.8m due within 12 months, and liabilities of US$180.7m due beyond 12 months. Offsetting these obligations, it had cash of US$353.5m as well as receivables valued at US$74.1m due within 12 months. So it actually has US$83.1m 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.

In addition to that, we're happy to report that Harmony Biosciences Holdings has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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. Harmony Biosciences Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Harmony Biosciences Holdings recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Harmony Biosciences Holdings has US$159.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$219m. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Harmony Biosciences Holdings , and understanding them should be part of your investment process.

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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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.