When analysing debt levels, the balance sheet is the obvious place to start. It was also good to see that despite losing money on the EBIT line last year, Sims turned things around in the last 12 months, delivering and EBIT of AU$111m. When we examine debt levels, we first consider both cash and debt levels, together. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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. If things get really bad, the lenders can take control of the business. But should shareholders be worried about its use of debt? When Is Debt Dangerous?ĭebt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Importantly, Sims Limited ( ASX:SGM) does carry debt. What we care about is avoiding the 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. David Iben put it well when he said, 'Volatility is not a risk we care about.