Would Color Star Technology (NASDAQ:ADD) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Color Star Technology Co., Ltd. (NASDAQ:ADD) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Color Star Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Color Star Technology had debt of US$2.05m, up from US$1.80m in one year. On the flip side, it has US$130.3k in cash leading to net debt of about US$1.92m.

How Strong Is Color Star Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Color Star Technology had liabilities of US$9.48m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of US$130.3k and US$4.97m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.38m.

Of course, Color Star Technology has a market capitalization of US$26.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Color Star Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Check out our latest analysis for Color Star Technology

In the last year Color Star Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 67%, to US$1.8m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Color Star Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 US$2.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 learn about the 6 warning signs we've spotted with Color Star Technology (including 4 which are significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.