Is STRATA Skin Sciences (NASDAQ:SSKN) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, STRATA Skin Sciences, Inc. (NASDAQ:SSKN) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

What Is STRATA Skin Sciences's Debt?

As you can see below, at the end of March 2024, STRATA Skin Sciences had US$15.1m of debt, up from US$7.52m a year ago. Click the image for more detail. However, it also had US$5.24m in cash, and so its net debt is US$9.84m.

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$12.6m falling due within a year, and liabilities of US$18.0m due beyond that. On the other hand, it had cash of US$5.24m and US$3.63m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$21.7m.

The deficiency here weighs heavily on the US$13.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, STRATA Skin Sciences would probably need a major re-capitalization if its creditors were to demand repayment. 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 made a loss at the EBIT level, and saw its revenue drop to US$33m, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

Not only did STRATA Skin Sciences's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$6.6m. 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$4.5m 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. However, not all investment risk resides within the balance sheet - far from it. For example - STRATA Skin Sciences has 4 warning signs we think you should be aware of.

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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