Rock star Growth Puts Star Combo Pharma (ASX:S66) In A Position To Use Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Star Combo Pharma Limited (ASX:S66) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Star Combo Pharma

What Is Star Combo Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Star Combo Pharma had AU$2.07m of debt, an increase on AU$57.9k, over one year. But it also has AU$26.6m in cash to offset that, meaning it has AU$24.5m net cash.

How Healthy Is Star Combo Pharma's Balance Sheet?

The latest balance sheet data shows that Star Combo Pharma had liabilities of AU$4.66m due within a year, and liabilities of AU$5.55m falling due after that. On the other hand, it had cash of AU$26.6m and AU$3.12m worth of receivables due within a year. So it actually has AU$19.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Star Combo Pharma's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Star Combo Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Star Combo Pharma will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Star Combo Pharma reported revenue of AU$39m, which is a gain of 81%, 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 Star Combo Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Star Combo Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$3.8m and booked a AU$349k accounting loss. But at least it has AU$24.5m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Star Combo Pharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Star Combo Pharma (of which 2 are concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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