Yahoo Finance Does Starpharma Holdings (ASX:SPL) Have A Healthy Balance Sheet?
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 note that Starpharma Holdings Limited (ASX:SPL) does have debt on its balance sheet. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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
How Much Debt Does Starpharma Holdings Carry?
As you can see below, Starpharma Holdings had AU$36.0k of debt at December 2018, down from AU$62.0k a year prior. But on the other hand it also has AU$44.4m in cash, leading to a AU$44.4m net cash position.
A Look At Starpharma Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Starpharma Holdings had liabilities of AU$4.22m due within 12 months and liabilities of AU$71.0k due beyond that. Offsetting these obligations, it had cash of AU$44.4m as well as receivables valued at AU$6.74m due within 12 months. So it can boast AU$46.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Starpharma Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 ultimately the future profitability of the business will decide if Starpharma 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.
Over 12 months, Starpharma Holdings saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.
So How Risky Is Starpharma Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Starpharma Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$6.5m of cash and made a loss of AU$11m. While this does make the company a bit risky, it's important to remember it has net cash of AU$44m. That means it could keep spending at its current rate for more than five years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Starpharma Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
