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 can see that SRG Global Limited (ASX:SRG) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SRG Global

How Much Debt Does SRG Global Carry?

The image below, which you can click on for greater detail, shows that SRG Global had debt of AU$31.7m at the end of December 2021, a reduction from AU$35.0m over a year. However, it does have AU$60.0m in cash offsetting this, leading to net cash of AU$28.3m.

How Healthy Is SRG Global's Balance Sheet?

According to the last reported balance sheet, SRG Global had liabilities of AU$165.5m due within 12 months, and liabilities of AU$34.0m due beyond 12 months. Offsetting these obligations, it had cash of AU$60.0m as well as receivables valued at AU$114.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$24.5m.

Of course, SRG Global has a market capitalization of AU$271.9m, 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. While it does have liabilities worth noting, SRG Global also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, SRG Global turned things around in the last 12 months, delivering and EBIT of AU$28m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SRG Global can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.