Is Beauty Health (NASDAQ:SKIN) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, The Beauty Health Company (NASDAQ:SKIN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beauty Health

What Is Beauty Health's Net Debt?

The image below, which you can click on for greater detail, shows that Beauty Health had debt of US$551.4m at the end of September 2024, a reduction from US$737.3m over a year. However, it also had US$358.9m in cash, and so its net debt is US$192.5m.

A Look At Beauty Health's Liabilities

Zooming in on the latest balance sheet data, we can see that Beauty Health had liabilities of US$73.9m due within 12 months and liabilities of US$565.9m due beyond that. Offsetting these obligations, it had cash of US$358.9m as well as receivables valued at US$36.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$244.3m.

Given this deficit is actually higher than the company's market capitalization of US$186.2m, we think shareholders really should watch Beauty Health's debt levels, like a parent watching their child ride a bike for the first time. 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 13%, to US$348m. We would much prefer see growth.

Caveat Emptor

While Beauty Health's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$79m. When we look at that alongside the significant liabilities, we're not particularly confident 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$14m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Beauty Health you should be aware of.

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.