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 note that Waldencast plc (NASDAQ:WALD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Waldencast Carry?

As you can see below, Waldencast had US$159.8m of debt at December 2023, down from US$179.3m a year prior. However, it does have US$21.1m in cash offsetting this, leading to net debt of about US$138.7m.

How Healthy Is Waldencast's Balance Sheet?

According to the last reported balance sheet, Waldencast had liabilities of US$62.7m due within 12 months, and liabilities of US$210.7m due beyond 12 months. Offsetting these obligations, it had cash of US$21.1m as well as receivables valued at US$22.4m due within 12 months. So it has liabilities totalling US$229.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Waldencast is worth US$502.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Waldencast's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Waldencast wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to US$218m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Waldencast's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$82m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$32m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Waldencast is showing 3 warning signs in our investment analysis , you should know about...

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

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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.

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