Is Silvair (WSE:SVRS) Using Too Much 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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Silvair

What Is Silvair's Debt?

As you can see below, Silvair had US$3.30m of debt at June 2022, down from US$4.21m a year prior. On the flip side, it has US$1.08m in cash leading to net debt of about US$2.22m.

How Strong Is Silvair's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Silvair had liabilities of US$3.27m due within 12 months and liabilities of US$1.26m due beyond that. On the other hand, it had cash of US$1.08m and US$366.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.09m.

Of course, Silvair has a market capitalization of US$17.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Silvair will need earnings to service that debt. 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 76%, to US$894k. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Importantly, Silvair had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$2.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$2.2m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 6 warning signs with Silvair (at least 3 which are 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.