Is Sitoy Group Holdings (HKG:1023) Weighed On By Its Debt Load?

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 note that Sitoy Group Holdings Limited (HKG:1023) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Sitoy Group Holdings

What Is Sitoy Group Holdings's Net Debt?

As you can see below, Sitoy Group Holdings had HK$137.8m of debt at December 2020, down from HK$168.8m a year prior. But on the other hand it also has HK$461.8m in cash, leading to a HK$324.0m net cash position.

How Strong Is Sitoy Group Holdings' Balance Sheet?

The latest balance sheet data shows that Sitoy Group Holdings had liabilities of HK$515.7m due within a year, and liabilities of HK$58.6m falling due after that. On the other hand, it had cash of HK$461.8m and HK$318.2m worth of receivables due within a year. So it can boast HK$205.7m more liquid assets than total liabilities.

This luscious liquidity implies that Sitoy Group Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Sitoy Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Sitoy Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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, Sitoy Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.4b, which is a fall of 40%. That makes us nervous, to say the least.

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$48m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 3 warning signs for Sitoy Group Holdings (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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