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

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.' 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. Importantly, Silvair, Inc. (WSE:SVRS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Silvair

How Much Debt Does Silvair Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Silvair had debt of US$3.86m, up from US$2.50m in one year. However, because it has a cash reserve of US$251.0k, its net debt is less, at about US$3.61m.

A Look At Silvair's Liabilities

According to the last reported balance sheet, Silvair had liabilities of US$4.17m due within 12 months, and liabilities of US$1.69m due beyond 12 months. Offsetting this, it had US$251.0k in cash and US$518.0k in receivables that were due within 12 months. So its liabilities total US$5.09m more than the combination of its cash and short-term receivables.

Silvair has a market capitalization of US$13.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Silvair made a loss at the EBIT level, and saw its revenue drop to US$1.9m, which is a fall of 3.2%. That's not what we would hope to see.

Caveat Emptor

Importantly, Silvair had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$1.3m 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. However, it doesn't help that it burned through US$1.2m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Silvair (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.