Does Silver Base Group Holdings (HKG:886) Have A Healthy Balance Sheet?

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.' 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. We note that Silver Base Group Holdings Limited (HKG:886) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Silver Base Group Holdings

What Is Silver Base Group Holdings's Net Debt?

As you can see below, at the end of March 2021, Silver Base Group Holdings had HK$1.01b of debt, up from HK$904.2m a year ago. Click the image for more detail. On the flip side, it has HK$975.4m in cash leading to net debt of about HK$31.1m.

How Strong Is Silver Base Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Silver Base Group Holdings had liabilities of HK$1.57b falling due within a year, and liabilities of HK$353.6m due beyond that. On the other hand, it had cash of HK$975.4m and HK$16.9m worth of receivables due within a year. So its liabilities total HK$934.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$354.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Silver Base Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Silver Base Group Holdings'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.

In the last year Silver Base Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 42%, to HK$938m. To be frank that doesn't bode well.

Caveat Emptor

While Silver Base Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$109m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$20m in the last year. 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. Case in point: We've spotted 3 warning signs for Silver Base Group Holdings you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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