Is Sino-i Technology (HKG:250) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Sino-i Technology Limited (HKG:250) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sino-i Technology

What Is Sino-i Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Sino-i Technology had debt of HK$37.2m, up from HK$33.5m in one year. But on the other hand it also has HK$346.6m in cash, leading to a HK$309.4m net cash position.

How Strong Is Sino-i Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sino-i Technology had liabilities of HK$688.9m due within 12 months and liabilities of HK$32.8m due beyond that. Offsetting these obligations, it had cash of HK$346.6m as well as receivables valued at HK$1.54b due within 12 months. So it actually has HK$1.17b more liquid assets than total liabilities.

This surplus liquidity suggests that Sino-i Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sino-i Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Sino-i Technology made a loss at the EBIT level, last year, it was also good to see that it generated HK$35m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sino-i Technology 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sino-i Technology 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, Sino-i Technology 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 we empathize with investors who find debt concerning, you should keep in mind that Sino-i Technology has net cash of HK$309.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 346% of that EBIT to free cash flow, bringing in HK$120m. So is Sino-i Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Sino-i Technology that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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