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

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 can see that Establishment Labs Holdings Inc. (NASDAQ:ESTA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 June 2024 Establishment Labs Holdings had debt of US$193.7m, up from US$182.0m in one year. However, it does have US$54.6m in cash offsetting this, leading to net debt of about US$139.1m.

A Look At Establishment Labs Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Establishment Labs Holdings had liabilities of US$41.9m due within 12 months and liabilities of US$198.2m due beyond that. Offsetting these obligations, it had cash of US$54.6m as well as receivables valued at US$60.0m due within 12 months. So its liabilities total US$125.5m more than the combination of its cash and short-term receivables.

Given Establishment Labs Holdings has a market capitalization of US$1.19b, 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Establishment Labs Holdings had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$151m. We would much prefer see growth.

Caveat Emptor

Not only did Establishment Labs Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$61m. 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. Another cause for caution is that is bled US$87m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Establishment Labs Holdings that you should be aware of.

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.