Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Evolus, Inc. (NASDAQ:EOLS) does carry debt. But the real question is whether this debt is making the company risky.
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Evolus Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Evolus had US$72.9m of debt, an increase on none, over one year. But on the other hand it also has US$99.9m in cash, leading to a US$27.1m net cash position.
How Healthy Is Evolus's Balance Sheet?
According to the last reported balance sheet, Evolus had liabilities of US$23.1m due within 12 months, and liabilities of US$138.5m due beyond 12 months. On the other hand, it had cash of US$99.9m and US$1.41m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$60.3m.
Since publicly traded Evolus shares are worth a total of US$405.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Evolus also has more cash than debt, so we're pretty confident 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 Evolus 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.
While it hasn't made a profit, at least Evolus booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Evolus?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Evolus lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$73m and booked a US$73m accounting loss. But at least it has US$100m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Evolus I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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