Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Straker Translations Limited (ASX:STG) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Straker Translations
How Much Debt Does Straker Translations Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Straker Translations had NZ$8.40m of debt, an increase on none, over one year. On the flip side, it has NZ$7.18m in cash leading to net debt of about NZ$1.23m.
How Healthy Is Straker Translations' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Straker Translations had liabilities of NZ$22.1m due within 12 months and liabilities of NZ$3.59m due beyond that. Offsetting this, it had NZ$7.18m in cash and NZ$8.22m in receivables that were due within 12 months. So it has liabilities totalling NZ$10.3m more than its cash and near-term receivables, combined.
Of course, Straker Translations has a market capitalization of NZ$131.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Straker Translations has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Straker Translations 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.
In the last year Straker Translations wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to NZ$31m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Straker Translations produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NZ$3.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NZ$2.0m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Be aware that Straker Translations is showing 3 warning signs in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About ASX:STG
Straker
Engages in the provision of language services and technology solutions in the Asia Pacific, Europe, the Middle East, Africa, and North America.
Flawless balance sheet and fair value.