Here's Why Establishment Labs Holdings (NASDAQ:ESTA) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Establishment Labs Holdings Carry?

As you can see below, at the end of December 2024, Establishment Labs Holdings had US$219.6m of debt, up from US$188.7m a year ago. Click the image for more detail. However, it also had US$90.3m in cash, and so its net debt is US$129.2m.

How Strong Is Establishment Labs Holdings' Balance Sheet?

According to the last reported balance sheet, Establishment Labs Holdings had liabilities of US$68.3m due within 12 months, and liabilities of US$225.5m due beyond 12 months. Offsetting these obligations, it had cash of US$90.3m as well as receivables valued at US$65.0m due within 12 months. So its liabilities total US$138.4m more than the combination of its cash and short-term receivables.

Given Establishment Labs Holdings has a market capitalization of US$902.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Establishment Labs Holdings 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.

View our latest analysis for Establishment Labs Holdings

In the last year Establishment Labs Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Establishment Labs Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$50m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$74m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 1 warning sign for Establishment Labs Holdings you should be aware of.

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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.