Star Equity Holdings (NASDAQ:STRR) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Star Equity Holdings, Inc. (NASDAQ:STRR) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Star Equity Holdings

What Is Star Equity Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Star Equity Holdings had debt of US$11.9m at the end of September 2022, a reduction from US$12.9m over a year. However, because it has a cash reserve of US$11.7m, its net debt is less, at about US$169.0k.

A Look At Star Equity Holdings' Liabilities

According to the last reported balance sheet, Star Equity Holdings had liabilities of US$32.2m due within 12 months, and liabilities of US$4.53m due beyond 12 months. Offsetting this, it had US$11.7m in cash and US$13.8m in receivables that were due within 12 months. So its liabilities total US$11.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$12.9m, so it does suggest shareholders should keep an eye on Star Equity Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Carrying virtually no net debt, Star Equity Holdings has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Star Equity Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Star Equity Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 9.4%, to US$110m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Star Equity Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$4.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$13m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Star Equity Holdings .

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.