Health Check: How Prudently Does Establishment Labs Holdings (NASDAQ:ESTA) Use 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. We note that Establishment Labs Holdings Inc. (NASDAQ:ESTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Establishment Labs Holdings

How Much Debt Does Establishment Labs Holdings Carry?

As you can see below, Establishment Labs Holdings had US$51.3m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$64.6m in cash, so it actually has US$13.3m net cash.

How Strong Is Establishment Labs Holdings' Balance Sheet?

We can see from the most recent balance sheet that Establishment Labs Holdings had liabilities of US$30.5m falling due within a year, and liabilities of US$56.3m due beyond that. Offsetting this, it had US$64.6m in cash and US$24.7m in receivables that were due within 12 months. So it actually has US$2.53m more liquid assets than total liabilities.

This state of affairs indicates that Establishment Labs Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.25b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Establishment Labs Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 44%, to US$118m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Establishment Labs Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Establishment Labs Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$21m of cash and made a loss of US$33m. But at least it has US$13.3m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Establishment Labs Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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. Be aware that Establishment Labs Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.