Strip Tinning Holdings (LON:STG) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Strip Tinning Holdings plc (LON:STG) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Strip Tinning Holdings

What Is Strip Tinning Holdings's Debt?

As you can see below, at the end of December 2023, Strip Tinning Holdings had UK£1.77m of debt, up from UK£1.55m a year ago. Click the image for more detail. However, because it has a cash reserve of UK£343.0k, its net debt is less, at about UK£1.43m.

How Strong Is Strip Tinning Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Strip Tinning Holdings had liabilities of UK£3.37m due within 12 months and liabilities of UK£2.11m due beyond that. On the other hand, it had cash of UK£343.0k and UK£3.41m worth of receivables due within a year. So its liabilities total UK£1.73m more than the combination of its cash and short-term receivables.

Since publicly traded Strip Tinning Holdings shares are worth a total of UK£9.13m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Strip Tinning Holdings'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.

In the last year Strip Tinning Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.8%, to UK£11m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Strip Tinning Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£1.4m at the EBIT level. 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. Another cause for caution is that is bled UK£652k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Strip Tinning Holdings (including 1 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.