Is Star seedsLtd (TSE:3083) A Risky Investment?

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 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, Star seeds Co.,Ltd. (TSE:3083) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Star seedsLtd

How Much Debt Does Star seedsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2024 Star seedsLtd had JP¥746.0m of debt, an increase on JP¥572.0m, over one year. However, it also had JP¥503.0m in cash, and so its net debt is JP¥243.0m.

How Healthy Is Star seedsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Star seedsLtd had liabilities of JP¥1.38b due within 12 months and liabilities of JP¥710.0m due beyond that. Offsetting this, it had JP¥503.0m in cash and JP¥490.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥1.09b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Star seedsLtd has a market capitalization of JP¥2.34b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Star seedsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Star seedsLtd made a loss at the EBIT level, and saw its revenue drop to JP¥5.0b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did Star seedsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at JP¥198m. 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 JP¥280m 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Star seedsLtd (including 2 which shouldn't be ignored) .

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.

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.