Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Evolus, Inc. (NASDAQ:EOLS) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
How Much Debt Does Evolus Carry?
As you can see below, at the end of June 2022, Evolus had US$71.5m of debt, up from US$19.6m a year ago. Click the image for more detail. But on the other hand it also has US$84.5m in cash, leading to a US$12.9m net cash position.
How Healthy Is Evolus' Balance Sheet?
We can see from the most recent balance sheet that Evolus had liabilities of US$51.5m falling due within a year, and liabilities of US$112.5m due beyond that. Offsetting these obligations, it had cash of US$84.5m as well as receivables valued at US$26.9m due within 12 months. So it has liabilities totalling US$52.6m more than its cash and near-term receivables, combined.
Given Evolus has a market capitalization of US$543.6m, 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, Evolus boasts net cash, so it's fair to say it does not have a heavy debt load! 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 73%, to US$132m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Evolus?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Evolus had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$101m of cash and made a loss of US$79m. Given it only has net cash of US$12.9m, 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Evolus that you should be aware of.
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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