Is Silvair (WSE:SVRS) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Silvair, Inc. (WSE:SVRS) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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.

View our latest analysis for Silvair

What Is Silvair's Debt?

The image below, which you can click on for greater detail, shows that Silvair had debt of US$2.50m at the end of September 2023, a reduction from US$3.59m over a year. On the flip side, it has US$410.0k in cash leading to net debt of about US$2.09m.

How Healthy Is Silvair's Balance Sheet?

The latest balance sheet data shows that Silvair had liabilities of US$2.58m due within a year, and liabilities of US$1.39m falling due after that. Offsetting this, it had US$410.0k in cash and US$588.0k in receivables that were due within 12 months. So it has liabilities totalling US$2.97m more than its cash and near-term receivables, combined.

Of course, Silvair has a market capitalization of US$21.4m, 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 it is Silvair'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 Silvair wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to US$1.9m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Over the last twelve months Silvair produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$975k 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$1.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Silvair has 4 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.