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Silverlake Axis (SGX:5CP) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Silverlake Axis Ltd (SGX:5CP) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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Check out our latest analysis for Silverlake Axis

How Much Debt Does Silverlake Axis Carry?

The image below, which you can click on for greater detail, shows that at December 2019 Silverlake Axis had debt of RM100.3m, up from RM41.9m in one year. But on the other hand it also has RM679.3m in cash, leading to a RM579.0m net cash position.

SGX:5CP Historical Debt May 11th 2020
SGX:5CP Historical Debt May 11th 2020

How Strong Is Silverlake Axis's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Silverlake Axis had liabilities of RM439.8m due within 12 months and liabilities of RM194.5m due beyond that. On the other hand, it had cash of RM679.3m and RM210.6m worth of receivables due within a year. So it can boast RM255.5m more liquid assets than total liabilities.

This surplus suggests that Silverlake Axis has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Silverlake Axis boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Silverlake Axis grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Silverlake Axis can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Silverlake Axis 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. Over the last three years, Silverlake Axis recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Silverlake Axis has net cash of RM579.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM220m, being 87% of its EBIT. So we don't think Silverlake Axis's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Silverlake Axis , and understanding them should be part of your investment process.

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.

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.

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. Thank you for reading.