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.' 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. We can see that Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Harmony Biosciences Holdings's Debt?
As you can see below, Harmony Biosciences Holdings had US$197.1m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$370.7m in cash to offset that, meaning it has US$173.5m net cash.
How Healthy Is Harmony Biosciences Holdings' Balance Sheet?
The latest balance sheet data shows that Harmony Biosciences Holdings had liabilities of US$112.4m due within a year, and liabilities of US$184.0m falling due after that. Offsetting these obligations, it had cash of US$370.7m as well as receivables valued at US$67.3m due within 12 months. So it can boast US$141.5m more liquid assets than total liabilities.
This surplus suggests that Harmony Biosciences Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 97% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Harmony Biosciences Holdings 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.
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. During the last three years, Harmony Biosciences Holdings produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Harmony Biosciences Holdings has net cash of US$173.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 97% over the last year. So we don't think Harmony Biosciences Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Harmony Biosciences Holdings, you may well want to click here to check an interactive graph of its earnings per share history.
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.