Is STRATA Skin Sciences (NASDAQ:SSKN) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, STRATA Skin Sciences, Inc. (NASDAQ:SSKN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for STRATA Skin Sciences

What Is STRATA Skin Sciences's Debt?

As you can see below, STRATA Skin Sciences had US$7.44m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$7.45m in cash offsetting this, leading to net cash of US$19.0k.

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$14.2m falling due within a year, and liabilities of US$17.3m due beyond that. Offsetting these obligations, it had cash of US$7.45m as well as receivables valued at US$3.66m due within 12 months. So it has liabilities totalling US$20.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$31.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, STRATA Skin Sciences also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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.

Over 12 months, STRATA Skin Sciences reported revenue of US$35m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is STRATA Skin Sciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that STRATA Skin Sciences had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$3.6m of cash and made a loss of US$6.2m. While this does make the company a bit risky, it's important to remember it has net cash of US$19.0k. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, STRATA Skin Sciences may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that STRATA Skin Sciences is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.