We Think Star Equity Holdings (NASDAQ:STRR) Has A Fair Chunk Of 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Star Equity Holdings, Inc. (NASDAQ:STRR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Star Equity Holdings

What Is Star Equity Holdings's Debt?

The image below, which you can click on for greater detail, shows that Star Equity Holdings had debt of US$16.8m at the end of March 2021, a reduction from US$22.0m over a year. On the flip side, it has US$13.2m in cash leading to net debt of about US$3.65m.

How Healthy Is Star Equity Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Star Equity Holdings had liabilities of US$30.6m due within 12 months and liabilities of US$4.86m due beyond that. Offsetting this, it had US$13.2m in cash and US$14.9m in receivables that were due within 12 months. So its liabilities total US$7.35m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Star Equity Holdings has a market capitalization of US$19.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 19%, to US$81m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Star Equity Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$7.0m. 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. Another cause for caution is that is bled US$9.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. We've identified 3 warning signs with Star Equity Holdings , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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