H C Slingsby (LON:SLNG) Use Of Debt Could Be Considered Risky

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that H C Slingsby plc (LON:SLNG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for H C Slingsby

What Is H C Slingsby's Net Debt?

The chart below, which you can click on for greater detail, shows that H C Slingsby had UK£2.24m in debt in December 2023; about the same as the year before. However, it does have UK£2.45m in cash offsetting this, leading to net cash of UK£205.0k.

A Look At H C Slingsby's Liabilities

We can see from the most recent balance sheet that H C Slingsby had liabilities of UK£5.07m falling due within a year, and liabilities of UK£6.53m due beyond that. Offsetting this, it had UK£2.45m in cash and UK£2.57m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£6.58m.

This deficit casts a shadow over the UK£2.89m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, H C Slingsby would likely require a major re-capitalisation if it had to pay its creditors today. Given that H C Slingsby has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It is just as well that H C Slingsby's load is not too heavy, because its EBIT was down 27% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is H C Slingsby's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While H C Slingsby has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, H C Slingsby actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While H C Slingsby does have more liabilities than liquid assets, it also has net cash of UK£205.0k. Unfortunately, though, both its struggle level of total liabilities and its EBIT growth rate leave us concerned about H C Slingsby So despite the cash, we do think it carries some risks. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for H C Slingsby (of which 1 is significant!) 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.