Yahoo Finance Is Sylvania Platinum (LON:SLP) A Risky Investment?
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.' 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. We can see that Sylvania Platinum Limited (LON:SLP) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.
See our latest analysis for Sylvania Platinum
How Much Debt Does Sylvania Platinum Carry?
You can click the graphic below for the historical numbers, but it shows that Sylvania Platinum had US$341.9k of debt in December 2018, down from US$418.0k, one year before. However, it does have US$20.2m in cash offsetting this, leading to net cash of US$19.9m.
A Look At Sylvania Platinum's Liabilities
According to the last reported balance sheet, Sylvania Platinum had liabilities of US$5.80m due within 12 months, and liabilities of US$18.1m due beyond 12 months. Offsetting these obligations, it had cash of US$20.2m as well as receivables valued at US$23.8m due within 12 months. So it actually has US$20.2m more liquid assets than total liabilities.
It's good to see that Sylvania Platinum has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Sylvania Platinum boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Sylvania Platinum grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sylvania Platinum can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sylvania Platinum 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. Over the most recent three years, Sylvania Platinum recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Sylvania Platinum has net cash of US$20m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 30% over the last year. So we don't think Sylvania Platinum's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Sylvania Platinum, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
