Is Cutera (NASDAQ:CUTR) A Risky Investment?

By
Simply Wall St
Published
September 17, 2021
NasdaqGS:CUTR
Source: Shutterstock

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Cutera, Inc. (NASDAQ:CUTR) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Cutera

What Is Cutera's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Cutera had debt of US$133.8m, up from US$7.15m in one year. But on the other hand it also has US$169.2m in cash, leading to a US$35.4m net cash position.

debt-equity-history-analysis
NasdaqGS:CUTR Debt to Equity History September 17th 2021

How Strong Is Cutera's Balance Sheet?

The latest balance sheet data shows that Cutera had liabilities of US$60.3m due within a year, and liabilities of US$150.5m falling due after that. Offsetting these obligations, it had cash of US$169.2m as well as receivables valued at US$26.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$15.2m.

This state of affairs indicates that Cutera'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$859.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Cutera also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Cutera made a loss at the EBIT level, last year, but improved that to positive EBIT of US$4.3m in the last twelve months. 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 Cutera 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cutera has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Cutera actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Cutera has US$35.4m in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in US$4.6m. So is Cutera's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Cutera (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.