We Think STRATA Skin Sciences (NASDAQ:SSKN) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. We note that STRATA Skin Sciences, Inc. (NASDAQ:SSKN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for STRATA Skin Sciences

What Is STRATA Skin Sciences's Debt?

As you can see below, STRATA Skin Sciences had US$7.52m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$2.83m, its net debt is less, at about US$4.69m.

How Strong 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$13.1m due within 12 months and liabilities of US$16.7m due beyond that. On the other hand, it had cash of US$2.83m and US$3.94m worth of receivables due within a year. So it has liabilities totalling US$23.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$35.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year STRATA Skin Sciences wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$37m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$4.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$6.2m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that STRATA Skin Sciences is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.