Establishment Labs Holdings (NASDAQ:ESTA) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Establishment Labs Holdings Inc. (NASDAQ:ESTA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Establishment Labs Holdings

What Is Establishment Labs Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Establishment Labs Holdings had debt of US$145.5m, up from US$50.8m in one year. However, it also had US$91.3m in cash, and so its net debt is US$54.2m.

How Healthy Is Establishment Labs Holdings' Balance Sheet?

According to the last reported balance sheet, Establishment Labs Holdings had liabilities of US$34.8m due within 12 months, and liabilities of US$149.3m due beyond 12 months. Offsetting this, it had US$91.3m in cash and US$32.0m in receivables that were due within 12 months. So its liabilities total US$60.8m more than the combination of its cash and short-term receivables.

Given Establishment Labs Holdings has a market capitalization of US$1.49b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Establishment Labs Holdings 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.

In the last year Establishment Labs Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$144m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Establishment Labs Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$34m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$61m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For instance, we've identified 2 warning signs for Establishment Labs Holdings that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.