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. 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, Silver Grant International Holdings Group Limited (HKG:171) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Silver Grant International Holdings Group

What Is Silver Grant International Holdings Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Silver Grant International Holdings Group had HK$1.98b of debt in June 2019, down from HK$3.48b, one year before. However, it does have HK$1.17b in cash offsetting this, leading to net debt of about HK$810.1m.

How Healthy Is Silver Grant International Holdings Group's Balance Sheet?

According to the last reported balance sheet, Silver Grant International Holdings Group had liabilities of HK$2.98b due within 12 months, and liabilities of HK$833.4m due beyond 12 months. Offsetting this, it had HK$1.17b in cash and HK$1.17b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.47b.

This deficit isn't so bad because Silver Grant International Holdings Group is worth HK$2.93b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Silver Grant International Holdings 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.

Over 12 months, Silver Grant International Holdings Group made a loss at the EBIT level, and saw its revenue drop to HK$450m, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Silver Grant International Holdings Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$410m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$299m into a profit. In the meantime, we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Silver Grant International Holdings Group's profit, revenue, and operating cashflow have changed over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.