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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Establishment Labs Holdings Inc. (NASDAQ:ESTA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Establishment Labs Holdings

How Much Debt Does Establishment Labs Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Establishment Labs Holdings had debt of US$148.2m, up from US$51.3m in one year. On the flip side, it has US$65.3m in cash leading to net debt of about US$82.8m.

A Look At Establishment Labs Holdings' Liabilities

The latest balance sheet data shows that Establishment Labs Holdings had liabilities of US$32.4m due within a year, and liabilities of US$153.8m falling due after that. Offsetting this, it had US$65.3m in cash and US$31.2m in receivables that were due within 12 months. So its liabilities total US$89.5m more than the combination of its cash and short-term receivables.

Of course, Establishment Labs Holdings has a market capitalization of US$1.78b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Establishment Labs Holdings'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 Establishment Labs Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$153m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Establishment Labs Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$36m at the EBIT level. 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. However, it doesn't help that it burned through US$74m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Establishment Labs Holdings that you should be aware of before investing here.

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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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.