Is CryptoStar (CVE:CSTR) Using Debt Sensibly?

By
Simply Wall St
Published
January 07, 2022
TSXV:CSTR
Source: Shutterstock

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that CryptoStar Corp. (CVE:CSTR) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CryptoStar

How Much Debt Does CryptoStar Carry?

As you can see below, CryptoStar had US$1.97m of debt at September 2021, down from US$3.56m a year prior. But on the other hand it also has US$15.8m in cash, leading to a US$13.8m net cash position.

debt-equity-history-analysis
TSXV:CSTR Debt to Equity History January 7th 2022

How Strong Is CryptoStar's Balance Sheet?

We can see from the most recent balance sheet that CryptoStar had liabilities of US$7.16m falling due within a year, and liabilities of US$3.97m due beyond that. Offsetting these obligations, it had cash of US$15.8m as well as receivables valued at US$223.5k due within 12 months. So it can boast US$4.87m more liquid assets than total liabilities.

This short term liquidity is a sign that CryptoStar could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CryptoStar 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 it is future earnings, more than anything, that will determine CryptoStar'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.

Over 12 months, CryptoStar reported revenue of US$2.2m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is CryptoStar?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CryptoStar had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$9.9m of cash and made a loss of US$7.2m. With only US$13.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 CryptoStar is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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