Is Sino ICT Holdings (HKG:365) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sino ICT Holdings Limited (HKG:365) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sino ICT Holdings

What Is Sino ICT Holdings's Debt?

As you can see below, Sino ICT Holdings had HK$440.3m of debt at December 2023, down from HK$470.9m a year prior. However, it also had HK$185.9m in cash, and so its net debt is HK$254.5m.

How Strong Is Sino ICT Holdings' Balance Sheet?

We can see from the most recent balance sheet that Sino ICT Holdings had liabilities of HK$328.8m falling due within a year, and liabilities of HK$378.2m due beyond that. Offsetting these obligations, it had cash of HK$185.9m as well as receivables valued at HK$154.7m due within 12 months. So it has liabilities totalling HK$366.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$240.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Sino ICT Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sino ICT Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Sino ICT Holdings made a loss at the EBIT level, and saw its revenue drop to HK$212m, which is a fall of 8.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Sino ICT Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$47m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$32m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sino ICT Holdings you should know about.

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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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.