Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Silver Tide Holdings Limited (HKG:1943) does carry debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Silver Tide Holdings's Debt?
As you can see below, at the end of September 2019, Silver Tide Holdings had HK$20.0m of debt, up from HK$21.2 a year ago. Click the image for more detail. But on the other hand it also has HK$115.2m in cash, leading to a HK$95.2m net cash position.
How Strong Is Silver Tide Holdings's Balance Sheet?
The latest balance sheet data shows that Silver Tide Holdings had liabilities of HK$68.8m due within a year, and liabilities of HK$1.34m falling due after that. Offsetting this, it had HK$115.2m in cash and HK$176.3m in receivables that were due within 12 months. So it actually has HK$221.3m more liquid assets than total liabilities.
This surplus liquidity suggests that Silver Tide Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Silver Tide Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
But the bad news is that Silver Tide Holdings has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Silver Tide Holdings's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Silver Tide Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last two years, Silver Tide Holdings actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While we empathize with investors who find debt concerning, you should keep in mind that Silver Tide Holdings has net cash of HK$95.2m, as well as more liquid assets than liabilities. So we are not troubled with Silver Tide Holdings's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Silver Tide Holdings's earnings per share history for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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