Establishment Labs Holdings (NASDAQ:ESTA) is quite indebted

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Establishment Labs Holdings Inc. (NASDAQ:ESTA) uses debt. But the more important question is: what risk does this debt create?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Establishment Labs Holdings

How much debt does Establishment Labs Holdings have?

The image below, which you can click on for more details, shows that in June 2022, Establishment Labs Holdings had $145.5 million in debt, up from $50.8 million in one year. However, he also had $91.3 million in cash, so his net debt is $54.2 million.

NasdaqCM: ESTA Debt to Equity History September 4, 2022

How healthy is Establishment Labs Holdings’ balance sheet?

According to the last published balance sheet, Establishment Labs Holdings had liabilities of $34.8 million due within 12 months and liabilities of $149.3 million due beyond 12 months. In return, it had $91.3 million in cash and $32.0 million in receivables due within 12 months. Thus, its liabilities total $60.8 million more than the combination of its cash and short-term receivables.

Given that Establishment Labs Holdings has a market capitalization of US$1.49 billion, it’s hard to believe that these liabilities pose much of a threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Establishment Labs Holdings can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Last year, Establishment Labs Holdings was not profitable in terms of EBIT, but managed to increase its revenue by 29%, to $144 million. With a little luck, the company will be able to progress towards profitability.

Caveat Emptor

While we can certainly appreciate Establishment Labs Holdings’ revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. To be precise, the EBIT loss amounted to 34 million US dollars. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. Another reason for caution is that it has lost $61 million in negative free cash flow over the past twelve months. So, to be frank, we think it’s risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for the Labs Holdings Establishment of which you should be aware.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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