We Think SICC (SHSE:688234) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. 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. As with many other companies SICC Co., Ltd. (SHSE:688234) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SICC

How Much Debt Does SICC Carry?

As you can see below, at the end of June 2024, SICC had CN¥407.6m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.06b in cash to offset that, meaning it has CN¥650.6m net cash.

A Look At SICC's Liabilities

We can see from the most recent balance sheet that SICC had liabilities of CN¥1.40b falling due within a year, and liabilities of CN¥484.2m due beyond that. Offsetting these obligations, it had cash of CN¥1.06b as well as receivables valued at CN¥450.8m due within 12 months. So it has liabilities totalling CN¥378.0m more than its cash and near-term receivables, combined.

Having regard to SICC's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥20.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, SICC boasts net cash, so it's fair to say it does not have a heavy debt load!

Although SICC made a loss at the EBIT level, last year, it was also good to see that it generated CN¥47m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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¥650.6m. So we are not troubled with SICC's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with SICC , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.