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Is CryptoStar (CVE:CSTR) Using Debt In A Risky Way?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, CryptoStar Corp. (CVE:CSTR) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 CryptoStar

What Is CryptoStar's Net Debt?

You can click the graphic below for the historical numbers, but it shows that CryptoStar had US$1.97m of debt in September 2021, down from US$3.56m, one year before. But it also has US$15.8m in cash to offset that, meaning it has US$13.8m net cash.

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

A Look At CryptoStar's Liabilities

According to the last reported balance sheet, CryptoStar had liabilities of US$7.16m due within 12 months, and liabilities of US$3.97m due beyond 12 months. Offsetting this, it had US$15.8m in cash and US$223.5k in receivables that were due within 12 months. So it can boast US$4.87m more liquid assets than total liabilities.

This short term liquidity is a sign that CryptoStar could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CryptoStar boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CryptoStar 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 CryptoStar wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$2.2m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is CryptoStar?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year CryptoStar had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$9.9m and booked a US$7.2m accounting loss. With only US$13.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example CryptoStar has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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