Does Establishment Labs Holdings (NASDAQ:ESTA) Have A Healthy Balance Sheet?
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. Importantly, Establishment Labs Holdings Inc. (NASDAQ:ESTA) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Establishment Labs Holdings
What Is Establishment Labs Holdings's Debt?
The chart below, which you can click on for greater detail, shows that Establishment Labs Holdings had US$52.5m in debt in June 2022; about the same as the year before. But it also has US$91.3m in cash to offset that, meaning it has US$38.8m net cash.
How Strong Is Establishment Labs Holdings' Balance Sheet?
The latest balance sheet data shows that Establishment Labs Holdings had liabilities of US$34.8m due within a year, and liabilities of US$149.3m falling due after that. Offsetting this, it had US$91.3m in cash and US$32.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$60.8m.
Since publicly traded Establishment Labs Holdings shares are worth a total of US$1.57b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Establishment Labs Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Establishment Labs Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Establishment Labs Holdings reported revenue of US$144m, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Establishment Labs Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Establishment Labs Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$37m of cash and made a loss of US$72m. But at least it has US$38.8m on the balance sheet to spend on growth, near-term. Establishment Labs Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 example - Establishment Labs Holdings has 2 warning signs we think you should be aware of.
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.
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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.
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