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Health Check: How Prudently Does Sientra (NASDAQ:SIEN) Use Debt?

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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 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. As with many other companies Sientra, Inc. (NASDAQ:SIEN) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sientra

What Is Sientra's Debt?

The image below, which you can click on for greater detail, shows that Sientra had debt of US$61.5m at the end of September 2021, a reduction from US$64.3m over a year. But on the other hand it also has US$66.1m in cash, leading to a US$4.64m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Sientra's Balance Sheet?

The latest balance sheet data shows that Sientra had liabilities of US$71.7m due within a year, and liabilities of US$74.2m falling due after that. On the other hand, it had cash of US$66.1m and US$26.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$53.2m.

This deficit isn't so bad because Sientra is worth US$159.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Sientra boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sientra's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sientra wasn't profitable at an EBIT level, but managed to grow its revenue by 53%, to US$92m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sientra?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sientra lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$43m of cash and made a loss of US$90m. However, it has net cash of US$4.64m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Sientra may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Sientra has 4 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.