Does Journey Medical (NASDAQ:DERM) Have A Healthy Balance Sheet?

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. As with many other companies Journey Medical Corporation (NASDAQ:DERM) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Journey Medical

What Is Journey Medical's Debt?

As you can see below, Journey Medical had US$17.6m of debt at December 2023, down from US$26.4m a year prior. However, it does have US$27.4m in cash offsetting this, leading to net cash of US$9.82m.

How Strong Is Journey Medical's Balance Sheet?

We can see from the most recent balance sheet that Journey Medical had liabilities of US$41.9m falling due within a year, and liabilities of US$14.6m due beyond that. Offsetting these obligations, it had cash of US$27.4m as well as receivables valued at US$15.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$13.8m.

Since publicly traded Journey Medical shares are worth a total of US$73.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Journey Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Journey Medical made a loss at the EBIT level, last year, but improved that to positive EBIT of US$1.1m in the last twelve months. 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 Journey Medical 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Journey Medical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent year, Journey Medical recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Journey Medical's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$9.82m. So while Journey Medical does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 4 warning signs for Journey Medical you should be aware of, and 1 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.