Is Silver Grant International Holdings Group (HKG:171) 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.' 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. As with many other companies Silver Grant International Holdings Group Limited (HKG:171) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Silver Grant International Holdings Group

How Much Debt Does Silver Grant International Holdings Group Carry?

You can click the graphic below for the historical numbers, but it shows that Silver Grant International Holdings Group had HK$3.97b of debt in December 2022, down from HK$5.08b, one year before. However, because it has a cash reserve of HK$906.9m, its net debt is less, at about HK$3.07b.

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$2.74b due within 12 months and liabilities of HK$2.78b due beyond that. On the other hand, it had cash of HK$906.9m and HK$2.68b worth of receivables due within a year. So its liabilities total HK$1.94b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$726.0m 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 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, Silver Grant International Holdings Group reported revenue of HK$97m, which is a gain of 131%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Silver Grant International Holdings Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$88m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$735m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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 Silver Grant International Holdings Group (1 is significant!) 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.