SOL Global Investments (CSE:SOL) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies SOL Global Investments Corp. (CSE:SOL) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SOL Global Investments

How Much Debt Does SOL Global Investments Carry?

The chart below, which you can click on for greater detail, shows that SOL Global Investments had CA$51.2m in debt in August 2021; about the same as the year before. But it also has CA$81.1m in cash to offset that, meaning it has CA$29.9m net cash.

How Strong Is SOL Global Investments' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SOL Global Investments had liabilities of CA$38.2m due within 12 months and liabilities of CA$146.0m due beyond that. Offsetting this, it had CA$81.1m in cash and CA$23.9m in receivables that were due within 12 months. So it has liabilities totalling CA$79.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$116.0m, so it does suggest shareholders should keep an eye on SOL Global Investments' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, SOL Global Investments also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that SOL Global Investments grew its EBIT by 602% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SOL Global Investments will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SOL Global Investments 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. In the last two years, SOL Global Investments created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While SOL Global Investments does have more liabilities than liquid assets, it also has net cash of CA$29.9m. And we liked the look of last year's 602% year-on-year EBIT growth. So we don't have any problem with SOL Global Investments's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for SOL Global Investments (1 is a bit concerning) you should be aware of.

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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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.