Is H C Slingsby (LON:SLNG) A Risky Investment?

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. Importantly, H C Slingsby plc (LON:SLNG) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for H C Slingsby

What Is H C Slingsby's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 H C Slingsby had debt of UK£2.03m, up from UK£1.76m in one year. But it also has UK£2.46m in cash to offset that, meaning it has UK£433.0k net cash.

How Healthy Is H C Slingsby's Balance Sheet?

According to the last reported balance sheet, H C Slingsby had liabilities of UK£5.52m due within 12 months, and liabilities of UK£6.26m due beyond 12 months. Offsetting this, it had UK£2.46m in cash and UK£3.29m in receivables that were due within 12 months. So it has liabilities totalling UK£6.03m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the UK£2.78m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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.

Also good is that H C Slingsby grew its EBIT at 10% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is H C Slingsby's earnings that will influence how the balance sheet holds up in the future. 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. H C Slingsby 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 three years, H C Slingsby's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While H C Slingsby does have more liabilities than liquid assets, it also has net cash of UK£433.0k. On top of that, it increased its EBIT by 10% in the last twelve months. So while H C Slingsby does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that H C Slingsby is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.