Journey Medical (NASDAQ:DERM) Has Debt But No Earnings; Should You Worry?

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. Importantly, Journey Medical Corporation (NASDAQ:DERM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Journey Medical

How Much Debt Does Journey Medical Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Journey Medical had US$21.0m of debt, an increase on US$3.00m, over one year. However, it does have US$22.5m in cash offsetting this, leading to net cash of US$1.43m.

How Strong Is Journey Medical's Balance Sheet?

The latest balance sheet data shows that Journey Medical had liabilities of US$33.3m due within a year, and liabilities of US$19.8m falling due after that. Offsetting this, it had US$22.5m in cash and US$10.7m in receivables that were due within 12 months. So it has liabilities totalling US$20.0m more than its cash and near-term receivables, combined.

Since publicly traded Journey Medical shares are worth a total of US$111.8m, 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. While it does have liabilities worth noting, Journey Medical also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Journey Medical's ability to maintain a healthy balance sheet going forward. 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, Journey Medical made a loss at the EBIT level, and saw its revenue drop to US$58m, which is a fall of 28%. To be frank that doesn't bode well.

So How Risky Is Journey Medical?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Journey Medical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$28m of cash and made a loss of US$18m. With only US$1.43m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with Journey Medical , and understanding them should be part of your investment process.

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.