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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Simonds Group Limited (ASX:SIO) makes use of debt. But is this debt a concern to shareholders?
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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Simonds Group
What Is Simonds Group's Net Debt?
As you can see below, Simonds Group had AU$7.90m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have AU$9.70m in cash offsetting this, leading to net cash of AU$1.81m.
A Look At Simonds Group's Liabilities
According to the last reported balance sheet, Simonds Group had liabilities of AU$116.7m due within 12 months, and liabilities of AU$16.6m due beyond 12 months. Offsetting this, it had AU$9.70m in cash and AU$82.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$41.3m.
This is a mountain of leverage relative to its market capitalization of AU$59.0m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Simonds Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Simonds Group grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Simonds Group will need earnings to service that debt. 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.