Health Check: How Prudently Does Beauty Health (NASDAQ:SKIN) Use Debt?

Warren Buffett famously said, '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. We note that The Beauty Health Company (NASDAQ:SKIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beauty Health

What Is Beauty Health's Net Debt?

As you can see below, Beauty Health had US$550.6m of debt at June 2024, down from US$736.3m a year prior. However, it does have US$349.5m in cash offsetting this, leading to net debt of about US$201.1m.

How Healthy Is Beauty Health's Balance Sheet?

We can see from the most recent balance sheet that Beauty Health had liabilities of US$75.4m falling due within a year, and liabilities of US$567.2m due beyond that. On the other hand, it had cash of US$349.5m and US$50.8m worth of receivables due within a year. So it has liabilities totalling US$242.3m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$202.2m market capitalization, you might well be inclined to review the balance sheet intently. 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 Beauty Health'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 Beauty Health had a loss before interest and tax, and actually shrunk its revenue by 6.3%, to US$366m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Beauty Health produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$140m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$8.3m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. Case in point: We've spotted 2 warning signs for Beauty Health you should be aware of, and 1 of them is significant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.