Is Silver Bullet Data Services Group (LON:SBDS) 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.' 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 Silver Bullet Data Services Group PLC (LON:SBDS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Silver Bullet Data Services Group

How Much Debt Does Silver Bullet Data Services Group Carry?

As you can see below, at the end of December 2023, Silver Bullet Data Services Group had UK£3.05m of debt, up from UK£1.84m a year ago. Click the image for more detail. On the flip side, it has UK£677.9k in cash leading to net debt of about UK£2.37m.

How Strong Is Silver Bullet Data Services Group's Balance Sheet?

The latest balance sheet data shows that Silver Bullet Data Services Group had liabilities of UK£3.26m due within a year, and liabilities of UK£3.11m falling due after that. Offsetting these obligations, it had cash of UK£677.9k as well as receivables valued at UK£3.33m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.36m.

Since publicly traded Silver Bullet Data Services Group shares are worth a total of UK£15.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Silver Bullet Data Services Group 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 Silver Bullet Data Services Group wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to UK£8.4m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Silver Bullet Data Services Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable UK£3.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£2.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example Silver Bullet Data Services Group has 4 warning signs (and 2 which are significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.