Evolus (NASDAQ:EOLS) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Evolus, Inc. (NASDAQ:EOLS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Evolus

What Is Evolus's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Evolus had debt of US$120.6m, up from US$72.0m in one year. However, because it has a cash reserve of US$97.0m, its net debt is less, at about US$23.7m.

A Look At Evolus' Liabilities

According to the last reported balance sheet, Evolus had liabilities of US$46.8m due within 12 months, and liabilities of US$160.9m due beyond 12 months. Offsetting these obligations, it had cash of US$97.0m as well as receivables valued at US$34.2m due within 12 months. So its liabilities total US$76.5m more than the combination of its cash and short-term receivables.

Of course, Evolus has a market capitalization of US$731.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Evolus 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.

In the last year Evolus wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to US$220m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Evolus still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$33m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$26m of cash over the last year. So to be blunt we think it is 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. Be aware that Evolus is showing 2 warning signs in our investment analysis , you should know about...

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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