Is Star Energy Group (LON:STAR) Using Debt In A Risky Way?

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.' 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. We can see that Star Energy Group Plc (LON:STAR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Star Energy Group

What Is Star Energy Group's Debt?

As you can see below, at the end of June 2024, Star Energy Group had UK£5.48m of debt, up from UK£5.24m a year ago. Click the image for more detail. However, because it has a cash reserve of UK£4.20m, its net debt is less, at about UK£1.28m.

How Strong Is Star Energy Group's Balance Sheet?

According to the last reported balance sheet, Star Energy Group had liabilities of UK£17.6m due within 12 months, and liabilities of UK£69.6m due beyond 12 months. Offsetting this, it had UK£4.20m in cash and UK£5.88m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£77.1m.

The deficiency here weighs heavily on the UK£8.50m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Star Energy Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Star Energy Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Star Energy Group had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to UK£49m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Star Energy Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£4.8m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost UK£6.6m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Be aware that Star Energy Group is showing 2 warning signs in our investment analysis , you should know about...

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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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.