Health Check: How Prudently Does L.S. Starrett (NYSE:SCX) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies The L.S. Starrett Company (NYSE:SCX) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for L.S. Starrett

What Is L.S. Starrett's Debt?

As you can see below, at the end of December 2020, L.S. Starrett had US$27.5m of debt, up from US$22.8m a year ago. Click the image for more detail. However, it also had US$14.6m in cash, and so its net debt is US$12.9m.

A Look At L.S. Starrett's Liabilities

According to the last reported balance sheet, L.S. Starrett had liabilities of US$30.7m due within 12 months, and liabilities of US$91.2m due beyond 12 months. Offsetting this, it had US$14.6m in cash and US$34.4m in receivables that were due within 12 months. So it has liabilities totalling US$73.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$39.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, L.S. Starrett would likely require a major re-capitalisation if it had to pay its creditors today. 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 L.S. Starrett 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.

In the last year L.S. Starrett had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$196m. We would much prefer see growth.

Caveat Emptor

While L.S. Starrett's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$13m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$5.3m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. Case in point: We've spotted 4 warning signs for L.S. Starrett you should be aware of, and 1 of them is a bit concerning.

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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