Here's Why China Silver Group (HKG:815) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that China Silver Group Limited (HKG:815) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Silver Group

What Is China Silver Group's Net Debt?

As you can see below, China Silver Group had CN¥421.2m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥524.7m in cash offsetting this, leading to net cash of CN¥103.5m.

A Look At China Silver Group's Liabilities

According to the last reported balance sheet, China Silver Group had liabilities of CN¥779.3m due within 12 months, and liabilities of CN¥5.64m due beyond 12 months. Offsetting these obligations, it had cash of CN¥524.7m as well as receivables valued at CN¥138.0m due within 12 months. So it has liabilities totalling CN¥122.3m more than its cash and near-term receivables, combined.

Of course, China Silver Group has a market capitalization of CN¥851.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, China Silver Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, China Silver Group made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥8.5m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Silver Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Silver Group 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. Over the last year, China Silver Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although China Silver Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥103.5m. So while China Silver Group 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for China Silver Group you should be aware of, and 1 of them shouldn't be ignored.

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.