Is STRATA Skin Sciences (NASDAQ:SSKN) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies STRATA Skin Sciences, Inc. (NASDAQ:SSKN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for STRATA Skin Sciences

How Much Debt Does STRATA Skin Sciences Carry?

The image below, which you can click on for greater detail, shows that at September 2023 STRATA Skin Sciences had debt of US$15.0m, up from US$7.44m in one year. However, it does have US$7.13m in cash offsetting this, leading to net debt of about US$7.89m.

How Strong Is STRATA Skin Sciences' Balance Sheet?

We can see from the most recent balance sheet that STRATA Skin Sciences had liabilities of US$12.0m falling due within a year, and liabilities of US$19.0m due beyond that. On the other hand, it had cash of US$7.13m and US$4.80m worth of receivables due within a year. So it has liabilities totalling US$19.1m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$17.0m, we think shareholders really should watch STRATA Skin Sciences's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine STRATA Skin Sciences'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 STRATA Skin Sciences's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, STRATA Skin Sciences had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$5.0m. Considering that alongside the liabilities mentioned above make us nervous 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. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 2 warning signs for STRATA Skin Sciences (1 is significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.