Does ReShape Lifesciences (NASDAQ:RSLS) Have A Healthy Balance Sheet?

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.' 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 ReShape Lifesciences Inc. (NASDAQ:RSLS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ReShape Lifesciences

How Much Debt Does ReShape Lifesciences Carry?

You can click the graphic below for the historical numbers, but it shows that ReShape Lifesciences had US$2.94m of debt in June 2021, down from US$8.03m, one year before. However, it does have US$40.2m in cash offsetting this, leading to net cash of US$37.2m.

How Strong Is ReShape Lifesciences' Balance Sheet?

According to the last reported balance sheet, ReShape Lifesciences had liabilities of US$60.5m due within 12 months, and liabilities of US$1.39m due beyond 12 months. Offsetting this, it had US$40.2m in cash and US$3.42m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$18.3m.

This is a mountain of leverage relative to its market capitalization of US$21.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, ReShape Lifesciences also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ReShape Lifesciences'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.

Over 12 months, ReShape Lifesciences reported revenue of US$14m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is ReShape Lifesciences?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ReShape Lifesciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$7.8m of cash and made a loss of US$22m. Given it only has net cash of US$37.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for ReShape Lifesciences you should know about.

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.
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