Is Sitoy Group Holdings (HKG:1023) Using Debt Sensibly?

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 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 Sitoy Group Holdings Limited (HKG:1023) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sitoy Group Holdings

What Is Sitoy Group Holdings's Net Debt?

As you can see below, at the end of June 2020, Sitoy Group Holdings had HK$200.8m of debt, up from HK$166.3m a year ago. Click the image for more detail. However, it does have HK$546.9m in cash offsetting this, leading to net cash of HK$346.2m.

A Look At Sitoy Group Holdings's Liabilities

We can see from the most recent balance sheet that Sitoy Group Holdings had liabilities of HK$520.0m falling due within a year, and liabilities of HK$99.7m due beyond that. On the other hand, it had cash of HK$546.9m and HK$271.1m worth of receivables due within a year. So it can boast HK$198.2m more liquid assets than total liabilities.

This luscious liquidity implies that Sitoy Group Holdings's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Sitoy Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sitoy Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sitoy Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 26%, to HK$1.8b. To be frank that doesn't bode well.

So How Risky Is Sitoy Group Holdings?

Although Sitoy Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$174m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Sitoy Group Holdings has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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. 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.
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