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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. As with many other companies H C Slingsby plc (LON:SLNG) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is H C Slingsby's Debt?
You can click the graphic below for the historical numbers, but it shows that H C Slingsby had UK£1.28m of debt in June 2021, down from UK£2.13m, one year before. But on the other hand it also has UK£2.08m in cash, leading to a UK£801.0k net cash position.
How Strong Is H C Slingsby's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that H C Slingsby had liabilities of UK£4.63m due within 12 months and liabilities of UK£7.79m due beyond that. Offsetting this, it had UK£2.08m in cash and UK£2.66m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£7.69m.
This deficit casts a shadow over the UK£2.00m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, H C Slingsby would probably need a major re-capitalization if its creditors were to demand repayment. H C Slingsby boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Another good sign is that H C Slingsby has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is H C Slingsby'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. H C Slingsby may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, H C Slingsby actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While H C Slingsby does have more liabilities than liquid assets, it also has net cash of UK£801.0k. And it impressed us with free cash flow of UK£1.2m, being 121% of its EBIT. So we are not troubled with H C Slingsby's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for H C Slingsby (1 is a bit concerning!) that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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