Is China Silver Group (HKG:815) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that China Silver Group Limited (HKG:815) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that 815 is potentially undervalued!

How Much Debt Does China Silver Group Carry?

The image below, which you can click on for greater detail, shows that at June 2022 China Silver Group had debt of CN¥469.2m, up from CN¥271.3m in one year. But it also has CN¥702.9m in cash to offset that, meaning it has CN¥233.8m net cash.

A Look At China Silver Group's Liabilities

The latest balance sheet data shows that China Silver Group had liabilities of CN¥880.7m due within a year, and liabilities of CN¥24.9m falling due after that. Offsetting this, it had CN¥702.9m in cash and CN¥97.9m in receivables that were due within 12 months. So its liabilities total CN¥104.8m more than the combination of its cash and short-term receivables.

Given China Silver Group has a market capitalization of CN¥604.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, China Silver Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Silver 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.

Over 12 months, China Silver Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 74%. That makes us nervous, to say the least.

So How Risky Is China Silver Group?

Although China Silver Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥380m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that China Silver Group is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.