Is Strattec Security (NASDAQ:STRT) 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, Strattec Security Corporation (NASDAQ:STRT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Strattec Security

How Much Debt Does Strattec Security Carry?

The chart below, which you can click on for greater detail, shows that Strattec Security had US$13.0m in debt in October 2023; about the same as the year before. However, it does have US$15.7m in cash offsetting this, leading to net cash of US$2.67m.

How Strong Is Strattec Security's Balance Sheet?

The latest balance sheet data shows that Strattec Security had liabilities of US$117.4m due within a year, and liabilities of US$7.92m falling due after that. Offsetting these obligations, it had cash of US$15.7m as well as receivables valued at US$102.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$7.13m.

Given Strattec Security has a market capitalization of US$93.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Strattec Security also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Strattec Security 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.

In the last year Strattec Security wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to US$508m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Strattec Security?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Strattec Security had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$14m of cash and made a loss of US$2.6m. Given it only has net cash of US$2.67m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Strattec Security has 2 warning signs we think you should be aware of.

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.