Here's Why Starpharma Holdings (ASX:SPL) Can Manage Its Debt Despite Losing Money

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Starpharma Holdings Limited (ASX:SPL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Starpharma Holdings

How Much Debt Does Starpharma Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Starpharma Holdings had debt of AU$2.40m, up from none in one year. But it also has AU$51.3m in cash to offset that, meaning it has AU$48.9m net cash.

How Strong Is Starpharma Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Starpharma Holdings had liabilities of AU$9.29m due within 12 months and liabilities of AU$2.95m due beyond that. Offsetting this, it had AU$51.3m in cash and AU$12.0m in receivables that were due within 12 months. So it can boast AU$51.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Starpharma Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Starpharma Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Starpharma Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Starpharma Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 125%, to AU$3.4m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Starpharma Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Starpharma Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$21m and booked a AU$18m accounting loss. But the saving grace is the AU$48.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Starpharma Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Starpharma Holdings is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.