Is SICC (SHSE:688234) 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. We note that SICC Co., Ltd. (SHSE:688234) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SICC

How Much Debt Does SICC Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 SICC had CN¥500.0m of debt, an increase on none, over one year. But it also has CN¥1.03b in cash to offset that, meaning it has CN¥525.1m net cash.

How Strong Is SICC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SICC had liabilities of CN¥1.37b due within 12 months and liabilities of CN¥489.4m due beyond that. On the other hand, it had cash of CN¥1.03b and CN¥496.2m worth of receivables due within a year. So its liabilities total CN¥338.5m more than the combination of its cash and short-term receivables.

Having regard to SICC's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥25.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, SICC boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, SICC turned things around in the last 12 months, delivering and EBIT of CN¥99m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SICC's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SICC 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 year, SICC saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about SICC's liabilities, but we can be reassured by the fact it has has net cash of CN¥525.1m. So we are not troubled with SICC's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with SICC .

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.

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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.