Is Hunan SilverLtd (SZSE:002716) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Hunan Silver Co.,Ltd. (SZSE:002716) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hunan SilverLtd

What Is Hunan SilverLtd's Debt?

As you can see below, Hunan SilverLtd had CN¥335.5m of debt at March 2024, down from CN¥690.5m a year prior. However, it does have CN¥491.7m in cash offsetting this, leading to net cash of CN¥156.2m.

A Look At Hunan SilverLtd's Liabilities

We can see from the most recent balance sheet that Hunan SilverLtd had liabilities of CN¥1.85b falling due within a year, and liabilities of CN¥964.3m due beyond that. On the other hand, it had cash of CN¥491.7m and CN¥46.7m worth of receivables due within a year. So its liabilities total CN¥2.28b more than the combination of its cash and short-term receivables.

Hunan SilverLtd has a market capitalization of CN¥9.01b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Hunan SilverLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hunan SilverLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Hunan SilverLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to CN¥5.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hunan SilverLtd?

While Hunan SilverLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥52m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Hunan SilverLtd shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock 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. To that end, you should learn about the 2 warning signs we've spotted with Hunan SilverLtd (including 1 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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