Is Establishment Labs Holdings (NASDAQ:ESTA) Using Debt Sensibly?

Simply Wall St
September 24, 2021
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Establishment Labs Holdings

What Is Establishment Labs Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Establishment Labs Holdings had US$50.8m in debt in June 2021; about the same as the year before. But it also has US$76.8m in cash to offset that, meaning it has US$26.0m net cash.

NasdaqCM:ESTA Debt to Equity History September 25th 2021

How Strong Is Establishment Labs Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Establishment Labs Holdings had liabilities of US$27.3m due within 12 months and liabilities of US$56.0m due beyond that. Offsetting these obligations, it had cash of US$76.8m as well as receivables valued at US$23.1m due within 12 months. So it can boast US$16.6m more liquid assets than total liabilities.

Having regard to Establishment Labs Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.64b 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. 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 37%, to US$112m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Establishment Labs Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Establishment Labs Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$13m and booked a US$22m accounting loss. But at least it has US$26.0m on the balance sheet to spend on growth, near-term. Establishment Labs Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Establishment Labs Holdings you should be aware of.

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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