Starlite Holdings (HKG:403) Could Easily Take On More 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 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. Importantly, Starlite Holdings Limited (HKG:403) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Starlite Holdings

How Much Debt Does Starlite Holdings Carry?

As you can see below, Starlite Holdings had HK$72.8m of debt at September 2023, down from HK$115.2m a year prior. However, its balance sheet shows it holds HK$238.2m in cash, so it actually has HK$165.4m net cash.

How Strong Is Starlite Holdings' Balance Sheet?

We can see from the most recent balance sheet that Starlite Holdings had liabilities of HK$280.3m falling due within a year, and liabilities of HK$8.99m due beyond that. On the other hand, it had cash of HK$238.2m and HK$205.7m worth of receivables due within a year. So it actually has HK$154.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Starlite Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Starlite Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Starlite Holdings improved its EBIT from a last year's loss to a positive HK$9.5m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Starlite 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Starlite Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Starlite Holdings actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Starlite Holdings has HK$165.4m in net cash and a strong balance sheet. The cherry on top was that in converted 340% of that EBIT to free cash flow, bringing in HK$32m. So we don't think Starlite Holdings's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Starlite Holdings you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.