Would Silver Grant International Holdings Group (HKG:171) Be Better Off With Less Debt?

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. We can see that Silver Grant International Holdings Group Limited (HKG:171) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Silver Grant International Holdings Group

How Much Debt Does Silver Grant International Holdings Group Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Silver Grant International Holdings Group had debt of HK$3.17b, up from HK$2.15b in one year. However, it does have HK$1.64b in cash offsetting this, leading to net debt of about HK$1.53b.

A Look At Silver Grant International Holdings Group's Liabilities

The latest balance sheet data shows that Silver Grant International Holdings Group had liabilities of HK$764.7m due within a year, and liabilities of HK$3.09b falling due after that. Offsetting this, it had HK$1.64b in cash and HK$1.86b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$350.7m.

This deficit isn't so bad because Silver Grant International Holdings Group is worth HK$1.57b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Silver Grant International Holdings Group made a loss at the EBIT level, and saw its revenue drop to HK$92m, which is a fall of 56%. That makes us nervous, to say the least.

Caveat Emptor

While Silver Grant International Holdings Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost HK$141m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$318m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Silver Grant International Holdings Group has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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. 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.
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