Is Silvair (WSE:SVRS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Silvair, Inc. (WSE:SVRS) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Silvair

How Much Debt Does Silvair Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Silvair had US$4.08m of debt, an increase on US$3.85m, over one year. However, because it has a cash reserve of US$1.36m, its net debt is less, at about US$2.72m.

A Look At Silvair's Liabilities

We can see from the most recent balance sheet that Silvair had liabilities of US$3.03m falling due within a year, and liabilities of US$2.56m due beyond that. Offsetting these obligations, it had cash of US$1.36m as well as receivables valued at US$249.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.98m.

Since publicly traded Silvair shares are worth a total of US$20.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Silvair'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 Silvair wasn't profitable at an EBIT level, but managed to grow its revenue by 165%, to US$509k. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Over the last twelve months Silvair produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$2.4m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$2.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Silvair has 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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