Stock Analysis

Is Evolus (NASDAQ:EOLS) Using Debt Sensibly?

NasdaqGM:EOLS
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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.' 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. We note that Evolus, Inc. (NASDAQ:EOLS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Evolus

What Is Evolus's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Evolus had US$71.2m of debt in December 2021, down from US$114.9m, one year before. But it also has US$146.3m in cash to offset that, meaning it has US$75.0m net cash.

debt-equity-history-analysis
NasdaqGM:EOLS Debt to Equity History March 21st 2022

How Strong Is Evolus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Evolus had liabilities of US$57.7m due within 12 months and liabilities of US$117.9m due beyond that. On the other hand, it had cash of US$146.3m and US$14.7m worth of receivables due within a year. So it has liabilities totalling US$14.7m more than its cash and near-term receivables, combined.

Since publicly traded Evolus shares are worth a total of US$634.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Evolus also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Evolus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Evolus reported revenue of US$100m, which is a gain of 76%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Evolus?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Evolus lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$34m of cash and made a loss of US$47m. Given it only has net cash of US$75.0m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Evolus may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 3 warning signs with Evolus , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Evolus is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.