Is Star Equity Holdings (NASDAQ:STRR) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Star Equity Holdings, Inc. (NASDAQ:STRR) does have debt on its balance sheet. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that STRR is potentially overvalued!

What Is Star Equity Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Star Equity Holdings had US$11.6m of debt in June 2022, down from US$13.1m, one year before. But on the other hand it also has US$16.2m in cash, leading to a US$4.64m net cash position.

How Healthy Is Star Equity Holdings' Balance Sheet?

According to the last reported balance sheet, Star Equity Holdings had liabilities of US$34.0m due within 12 months, and liabilities of US$5.23m due beyond 12 months. Offsetting this, it had US$16.2m in cash and US$15.2m in receivables that were due within 12 months. So it has liabilities totalling US$7.77m more than its cash and near-term receivables, combined.

Star Equity Holdings has a market capitalization of US$13.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Star Equity Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Star Equity Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Star Equity Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$114m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Star Equity Holdings?

Although Star Equity Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Star Equity Holdings shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. For example, we've discovered 3 warning signs for Star Equity Holdings (1 is concerning!) that you should be aware of before investing here.

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.