These 4 Measures Indicate That China Silver Group (HKG:815) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, China Silver Group Limited (HKG:815) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Silver Group

What Is China Silver Group's Debt?

The image below, which you can click on for greater detail, shows that China Silver Group had debt of CN¥407.2m at the end of June 2024, a reduction from CN¥426.5m over a year. But it also has CN¥545.3m in cash to offset that, meaning it has CN¥138.1m net cash.

How Healthy Is China Silver Group's Balance Sheet?

According to the last reported balance sheet, China Silver Group had liabilities of CN¥737.1m due within 12 months, and liabilities of CN¥4.07m due beyond 12 months. Offsetting this, it had CN¥545.3m in cash and CN¥145.9m in receivables that were due within 12 months. So its liabilities total CN¥50.0m more than the combination of its cash and short-term receivables.

Given China Silver Group has a market capitalization of CN¥495.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

We also note that China Silver Group improved its EBIT from a last year's loss to a positive CN¥31m. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Silver Group 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. During the last year, China Silver Group burned a lot of cash. 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¥138.1m. So while China Silver Group does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for China Silver Group that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.