Despite Lacking Profits Heron Therapeutics (NASDAQ:HRTX) Seems To Be On Top Of Its Debt
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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Heron Therapeutics, Inc. (NASDAQ:HRTX) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Heron Therapeutics
What Is Heron Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 Heron Therapeutics had US$5.62m of debt, an increase on US$4.57m, over one year. But it also has US$391.0m in cash to offset that, meaning it has US$385.3m net cash.
How Strong Is Heron Therapeutics's Balance Sheet?
According to the last reported balance sheet, Heron Therapeutics had liabilities of US$96.7m due within 12 months, and liabilities of US$12.2m due beyond 12 months. Offsetting this, it had US$391.0m in cash and US$39.9m in receivables that were due within 12 months. So it can boast US$321.9m more liquid assets than total liabilities.
This surplus strongly suggests that Heron Therapeutics has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Heron Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Heron Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 88%, to US$146m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Heron Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Heron Therapeutics had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$132m and booked a US$205m accounting loss. But the saving grace is the US$385.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Heron Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Heron Therapeutics , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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