Here's Why Journey Medical (NASDAQ:DERM) Has A Meaningful Debt Burden

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Journey Medical Corporation (NASDAQ:DERM) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Journey Medical

How Much Debt Does Journey Medical Carry?

As you can see below, at the end of June 2024, Journey Medical had US$22.7m of debt, up from US$13.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$23.9m in cash, so it actually has US$1.16m net cash.

How Healthy Is Journey Medical's Balance Sheet?

The latest balance sheet data shows that Journey Medical had liabilities of US$34.1m due within a year, and liabilities of US$19.7m falling due after that. Offsetting this, it had US$23.9m in cash and US$10.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$19.5m.

Given Journey Medical has a market capitalization of US$103.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Journey Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Journey Medical improved its EBIT from a last year's loss to a positive US$2.1m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Journey Medical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Journey Medical burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

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$1.16m. So while Journey Medical does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Journey Medical is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.