Is Heron Therapeutics (NASDAQ:HRTX) A Risky Investment?

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. Importantly, Heron Therapeutics, Inc. (NASDAQ:HRTX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Heron Therapeutics

What Is Heron Therapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that Heron Therapeutics had US$149.1m in debt in March 2022; about the same as the year before. On the flip side, it has US$111.9m in cash leading to net debt of about US$37.2m.

How Healthy Is Heron Therapeutics' Balance Sheet?

According to the last reported balance sheet, Heron Therapeutics had liabilities of US$93.0m due within 12 months, and liabilities of US$156.8m due beyond 12 months. Offsetting this, it had US$111.9m in cash and US$41.1m in receivables that were due within 12 months. So its liabilities total US$96.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Heron Therapeutics is worth US$421.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Heron Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Heron Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 7.8%, to US$90m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Heron Therapeutics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$229m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$209m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Heron Therapeutics that you should be aware of.

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.

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

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.