Touchstar (LON:TST) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Touchstar plc (LON:TST) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Touchstar

How Much Debt Does Touchstar Carry?

The image below, which you can click on for greater detail, shows that Touchstar had debt of UK£1.41m at the end of December 2020, a reduction from UK£2.29m over a year. However, its balance sheet shows it holds UK£3.18m in cash, so it actually has UK£1.77m net cash.

A Look At Touchstar's Liabilities

Zooming in on the latest balance sheet data, we can see that Touchstar had liabilities of UK£4.17m due within 12 months and liabilities of UK£881.0k due beyond that. Offsetting this, it had UK£3.18m in cash and UK£1.12m in receivables that were due within 12 months. So it has liabilities totalling UK£749.0k more than its cash and near-term receivables, combined.

Given Touchstar has a market capitalization of UK£6.36m, 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. Despite its noteworthy liabilities, Touchstar boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Touchstar made a loss at the EBIT level, last year, but improved that to positive EBIT of UK£39k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Touchstar can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Touchstar has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Touchstar actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Touchstar does have more liabilities than liquid assets, it also has net cash of UK£1.77m. And it impressed us with free cash flow of UK£1.1m, being 2,828% of its EBIT. So we are not troubled with Touchstar's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Touchstar .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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