The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Establishment Labs Holdings Inc. (NASDAQ:ESTA) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Establishment Labs Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Establishment Labs Holdings had US$23.7m of debt in June 2019, down from US$26.1m, one year before. However, it does have US$31.9m in cash offsetting this, leading to net cash of US$8.20m.
How Strong Is Establishment Labs Holdings's Balance Sheet?
The latest balance sheet data shows that Establishment Labs Holdings had liabilities of US$21.4m due within a year, and liabilities of US$29.6m falling due after that. Offsetting these obligations, it had cash of US$31.9m as well as receivables valued at US$21.3m due within 12 months. So it actually has US$2.17m more liquid assets than total liabilities.
This state of affairs indicates that Establishment Labs Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$376.8m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Establishment Labs Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Establishment Labs 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.
Over 12 months, Establishment Labs Holdings reported revenue of US$75m, which is a gain of 58%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Establishment Labs Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Establishment Labs Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$45m of cash and made a loss of US$29m. With only US$32m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Establishment Labs Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Establishment Labs Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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