Is Establishment Labs Holdings (NASDAQ:ESTA) A Risky Investment?

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.' 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Establishment Labs Holdings's Debt?

As you can see below, at the end of September 2023, Establishment Labs Holdings had US$185.3m of debt, up from US$148.2m a year ago. Click the image for more detail. On the flip side, it has US$52.2m in cash leading to net debt of about US$133.1m.

A Look At Establishment Labs Holdings' Liabilities

The latest balance sheet data shows that Establishment Labs Holdings had liabilities of US$50.3m due within a year, and liabilities of US$189.7m falling due after that. Offsetting this, it had US$52.2m in cash and US$56.4m in receivables that were due within 12 months. So it has liabilities totalling US$131.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Establishment Labs Holdings is worth US$601.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 16%, to US$177m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Establishment Labs Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$56m 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$125m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should be aware of the 3 warning signs we've spotted with Establishment Labs Holdings .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.