Is CryptoStar (CVE:CSTR) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 CryptoStar Corp. (CVE:CSTR) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CryptoStar

What Is CryptoStar's Net Debt?

As you can see below, CryptoStar had US$1.97m of debt at June 2021, down from US$3.57m a year prior. But it also has US$16.9m in cash to offset that, meaning it has US$14.9m net cash.

A Look At CryptoStar's Liabilities

Zooming in on the latest balance sheet data, we can see that CryptoStar had liabilities of US$619.0k due within 12 months and liabilities of US$4.05m due beyond that. On the other hand, it had cash of US$16.9m and US$221.6k worth of receivables due within a year. So it actually has US$12.4m more liquid assets than total liabilities.

This surplus suggests that CryptoStar is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that CryptoStar has more cash than debt is arguably a good indication that it can manage its debt safely. 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 CryptoStar 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.

Over 12 months, CryptoStar made a loss at the EBIT level, and saw its revenue drop to US$742k, which is a fall of 85%. To be frank that doesn't bode well.

So How Risky Is CryptoStar?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year CryptoStar had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$8.3m of cash and made a loss of US$7.5m. Given it only has net cash of US$14.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for CryptoStar (of which 3 are a bit concerning!) 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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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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