Would Venus Concept (NASDAQ:VERO) Be Better Off With Less Debt?

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. We can see that Venus Concept Inc. (NASDAQ:VERO) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Venus Concept

What Is Venus Concept's Debt?

The chart below, which you can click on for greater detail, shows that Venus Concept had US$77.7m in debt in December 2022; about the same as the year before. However, it also had US$11.6m in cash, and so its net debt is US$66.2m.

How Healthy Is Venus Concept's Balance Sheet?

According to the last reported balance sheet, Venus Concept had liabilities of US$39.6m due within 12 months, and liabilities of US$77.0m due beyond 12 months. Offsetting this, it had US$11.6m in cash and US$39.5m in receivables that were due within 12 months. So it has liabilities totalling US$65.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Venus Concept has a market capitalization of US$270.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Venus Concept 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.

Over 12 months, Venus Concept made a loss at the EBIT level, and saw its revenue drop to US$99m, which is a fall of 5.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, Venus Concept had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$35m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$27m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Venus Concept is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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.