In This Article:
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, China Silver Group Limited (HKG:815) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for China Silver Group
What Is China Silver Group's Debt?
The image below, which you can click on for greater detail, shows that China Silver Group had debt of CN¥79.6m at the end of December 2018, a reduction from CN¥130.4m over a year. But it also has CN¥694.0m in cash to offset that, meaning it has CN¥614.4m net cash.
A Look At China Silver Group's Liabilities
Zooming in on the latest balance sheet data, we can see that China Silver Group had liabilities of CN¥636.8m due within 12 months and liabilities of CN¥28.2m due beyond that. Offsetting these obligations, it had cash of CN¥694.0m as well as receivables valued at CN¥293.8m due within 12 months. So it actually has CN¥322.8m more liquid assets than total liabilities.
This excess liquidity suggests that China Silver Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, China Silver Group boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that China Silver Group saw its EBIT decline by 4.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Silver Group 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.