We Think Strip Tinning Holdings (LON:STG) Has A Fair Chunk Of Debt

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 can see that Strip Tinning Holdings plc (LON:STG) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Strip Tinning Holdings

How Much Debt Does Strip Tinning Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Strip Tinning Holdings had debt of UK£4.28m, up from UK£1.33m in one year. However, because it has a cash reserve of UK£2.03m, its net debt is less, at about UK£2.25m.

How Healthy Is Strip Tinning Holdings' Balance Sheet?

We can see from the most recent balance sheet that Strip Tinning Holdings had liabilities of UK£2.00m falling due within a year, and liabilities of UK£6.40m due beyond that. Offsetting these obligations, it had cash of UK£2.03m as well as receivables valued at UK£3.57m due within 12 months. So its liabilities total UK£2.81m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Strip Tinning Holdings has a market capitalization of UK£7.07m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Strip Tinning Holdings 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, Strip Tinning Holdings made a loss at the EBIT level, and saw its revenue drop to UK£10.0m, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

Not only did Strip Tinning Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping UK£2.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£1.9m 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. For example Strip Tinning Holdings has 4 warning signs (and 3 which are significant) we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.