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Despite Lacking Profits Starpharma Holdings (ASX:SPL) Seems To Be On Top Of Its Debt

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Starpharma Holdings Limited (ASX:SPL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Starpharma Holdings

What Is Starpharma Holdings's Debt?

As you can see below, at the end of December 2021, Starpharma Holdings had AU$2.40m of debt, up from none a year ago. Click the image for more detail. But it also has AU$51.3m in cash to offset that, meaning it has AU$48.9m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Starpharma Holdings' Balance Sheet?

We can see from the most recent balance sheet that Starpharma Holdings had liabilities of AU$9.29m falling due within a year, and liabilities of AU$2.95m due beyond that. On the other hand, it had cash of AU$51.3m and AU$12.0m worth of receivables due within a year. So it can boast AU$51.0m more liquid assets than total liabilities.

This surplus suggests that Starpharma Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Starpharma 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 it is Starpharma Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Starpharma Holdings reported revenue of AU$3.4m, which is a gain of 125%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Starpharma Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Starpharma Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$21m and booked a AU$18m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$48.9m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Starpharma Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 instance, we've identified 3 warning signs for Starpharma Holdings (1 makes us a bit uncomfortable) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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