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. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sientra, Inc. (NASDAQ:SIEN) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Sientra Carry?
As you can see below, at the end of September 2019, Sientra had US$45.5m of debt, up from US$34.7m a year ago. Click the image for more detail. But on the other hand it also has US$120.9m in cash, leading to a US$75.4m net cash position.
A Look At Sientra’s Liabilities
We can see from the most recent balance sheet that Sientra had liabilities of US$64.1m falling due within a year, and liabilities of US$59.5m due beyond that. Offsetting this, it had US$120.9m in cash and US$24.8m in receivables that were due within 12 months. So it can boast US$22.1m more liquid assets than total liabilities.
This surplus suggests that Sientra has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sientra has more cash than debt is arguably a good indication that it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sientra 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, Sientra reported revenue of US$80m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Sientra?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Sientra lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$92m and booked a US$111m accounting loss. However, it has net cash of US$75.4m, 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. 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. For instance, we’ve identified 3 warning signs for Sientra (1 is concerning) 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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