Starrag Group Holding (VTX:STGN) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Starrag Group Holding AG (VTX:STGN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Starrag Group Holding

What Is Starrag Group Holding's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Starrag Group Holding had debt of CHF26.0m, up from CHF14.0m in one year. But it also has CHF32.5m in cash to offset that, meaning it has CHF6.55m net cash.

How Strong Is Starrag Group Holding's Balance Sheet?

According to the last reported balance sheet, Starrag Group Holding had liabilities of CHF125.4m due within 12 months, and liabilities of CHF16.6m due beyond 12 months. Offsetting this, it had CHF32.5m in cash and CHF87.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF22.4m.

Given Starrag Group Holding has a market capitalization of CHF147.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Starrag Group Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Starrag Group Holding's EBIT fell a jaw-dropping 89% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Starrag Group Holding'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Starrag Group Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Starrag Group Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Starrag Group Holding does have more liabilities than liquid assets, it also has net cash of CHF6.55m. And it impressed us with free cash flow of CHF5.8m, being 111% of its EBIT. So we are not troubled with Starrag Group Holding's debt use. While Starrag Group Holding didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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. 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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