Health Check: How Prudently Does STRATA Skin Sciences (NASDAQ:SSKN) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, STRATA Skin Sciences, Inc. (NASDAQ:SSKN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, 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 STRATA Skin Sciences

What Is STRATA Skin Sciences's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 STRATA Skin Sciences had debt of US$15.0m, up from US$7.40m in one year. However, it also had US$9.03m in cash, and so its net debt is US$5.95m.

How Healthy Is STRATA Skin Sciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that STRATA Skin Sciences had liabilities of US$14.1m due within 12 months and liabilities of US$24.2m due beyond that. On the other hand, it had cash of US$9.03m and US$4.40m worth of receivables due within a year. So it has liabilities totalling US$24.9m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$16.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 STRATA Skin Sciences 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 STRATA Skin Sciences wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to US$36m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months STRATA Skin Sciences produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$5.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$6.1m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with STRATA Skin Sciences (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.