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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. We note that Establishment Labs Holdings Inc. (NASDAQ:ESTA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Establishment Labs Holdings

What Is Establishment Labs Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2019 Establishment Labs Holdings had debt of US$47.4m, up from US$21.5 in one year. However, because it has a cash reserve of US$42.6m, its net debt is less, at about US$4.83m.

How Healthy Is Establishment Labs Holdings's Balance Sheet?

We can see from the most recent balance sheet that Establishment Labs Holdings had liabilities of US$20.3m falling due within a year, and liabilities of US$54.1m due beyond that. On the other hand, it had cash of US$42.6m and US$22.0m worth of receivables due within a year. So its liabilities total US$9.87m more than the combination of its cash and short-term receivables.

Having regard to Establishment Labs Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$564.7m company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Establishment Labs Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Establishment Labs Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to US$82m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly savour Establishment Labs Holdings's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost US$35m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$45m 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. Case in point: We've spotted 4 warning signs for Establishment Labs Holdings you should be aware of, and 1 of them is potentially serious.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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