Is Silk Road Energy Services Group (HKG:8250) A Risky Investment?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Silk Road Energy Services Group Limited (HKG:8250) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Silk Road Energy Services Group
What Is Silk Road Energy Services Group's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2019 Silk Road Energy Services Group had debt of HK$120.2m, up from HK$115.1m in one year. However, its balance sheet shows it holds HK$127.5m in cash, so it actually has HK$7.30m net cash.
How Strong Is Silk Road Energy Services Group's Balance Sheet?
We can see from the most recent balance sheet that Silk Road Energy Services Group had liabilities of HK$195.4m falling due within a year, and liabilities of HK$6.18m due beyond that. On the other hand, it had cash of HK$127.5m and HK$416.5m worth of receivables due within a year. So it can boast HK$342.4m more liquid assets than total liabilities.
This excess liquidity is a great indication that Silk Road Energy Services Group's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Silk Road Energy Services Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Silk Road Energy Services Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Silk Road Energy Services Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Silk Road Energy Services Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Silk Road Energy Services Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$22m of cash and made a loss of HK$65m. But the saving grace is the HK$7.30m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Silk Road Energy Services Group is showing 4 warning signs in our investment analysis , you should know about...
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.
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.
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