Health Check: How Prudently Does Silver Grant International Holdings Group (HKG:171) Use Debt?

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.' 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. We note that Silver Grant International Holdings Group Limited (HKG:171) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Silver Grant International Holdings Group

What Is Silver Grant International Holdings Group's Net Debt?

The image below, which you can click on for greater detail, shows that Silver Grant International Holdings Group had debt of HK$3.55b at the end of December 2023, a reduction from HK$4.01b over a year. On the flip side, it has HK$492.0m in cash leading to net debt of about HK$3.06b.

A Look At Silver Grant International Holdings Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Silver Grant International Holdings Group had liabilities of HK$4.01b due within 12 months and liabilities of HK$271.2m due beyond that. Offsetting these obligations, it had cash of HK$492.0m as well as receivables valued at HK$1.90b due within 12 months. So it has liabilities totalling HK$1.89b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$232.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Silver Grant International Holdings Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Silver Grant International Holdings 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.

In the last year Silver Grant International Holdings Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Silver Grant International Holdings Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$564m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$947m in the last year. So we think buying this stock is risky. 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. We've identified 2 warning signs with Silver Grant International Holdings Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.