Is ST International Holdings (HKG:8521) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that ST International Holdings Company Limited (HKG:8521) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ST International Holdings

What Is ST International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that ST International Holdings had debt of HK$39.2m at the end of December 2022, a reduction from HK$44.4m over a year. But it also has HK$87.4m in cash to offset that, meaning it has HK$48.2m net cash.

How Strong Is ST International Holdings' Balance Sheet?

According to the last reported balance sheet, ST International Holdings had liabilities of HK$45.8m due within 12 months, and liabilities of HK$5.15m due beyond 12 months. Offsetting this, it had HK$87.4m in cash and HK$17.3m in receivables that were due within 12 months. So it can boast HK$53.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that ST International Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, ST International 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 you can't view debt in total isolation; since ST International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ST International Holdings had a loss before interest and tax, and actually shrunk its revenue by 7.4%, to HK$106m. That's not what we would hope to see.

So How Risky Is ST International Holdings?

While ST International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$9.5m. 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. There's no doubt the next few years will be crucial to how 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. For example ST International Holdings has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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. 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.