SRG Global (ASX:SRG) Could Easily Take On More Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SRG Global Limited (ASX:SRG) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is SRG Global's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 SRG Global had AU$96.0m of debt, an increase on AU$61.8m, over one year. However, it does have AU$105.1m in cash offsetting this, leading to net cash of AU$9.07m.

A Look At SRG Global's Liabilities

According to the last reported balance sheet, SRG Global had liabilities of AU$314.8m due within 12 months, and liabilities of AU$102.6m due beyond 12 months. Offsetting this, it had AU$105.1m in cash and AU$209.7m in receivables that were due within 12 months. So its liabilities total AU$102.6m more than the combination of its cash and short-term receivables.

Since publicly traded SRG Global shares are worth a total of AU$866.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, SRG Global also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for SRG Global

In addition to that, we're happy to report that SRG Global has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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 SRG Global 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SRG Global may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SRG Global generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While SRG Global does have more liabilities than liquid assets, it also has net cash of AU$9.07m. And it impressed us with free cash flow of AU$67m, being 93% of its EBIT. So we don't think SRG Global's use of debt is risky. 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. Be aware that SRG Global is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.