Is Sino-i Technology (HKG:250) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Sino-i Technology Limited (HKG:250) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Sino-i Technology

How Much Debt Does Sino-i Technology Carry?

As you can see below, at the end of June 2021, Sino-i Technology had HK$120.1m of debt, up from HK$44.3m a year ago. Click the image for more detail. But on the other hand it also has HK$705.6m in cash, leading to a HK$585.6m net cash position.

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

We can see from the most recent balance sheet that Sino-i Technology had liabilities of HK$824.3m falling due within a year, and liabilities of HK$30.5m due beyond that. On the other hand, it had cash of HK$705.6m and HK$36.9m worth of receivables due within a year. So its liabilities total HK$112.3m more than the combination of its cash and short-term receivables.

Given Sino-i Technology has a market capitalization of HK$781.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sino-i Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sino-i Technology'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 Sino-i Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to HK$1.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sino-i Technology?

While Sino-i Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$26m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. To that end, you should learn about the 4 warning signs we've spotted with Sino-i Technology (including 1 which is significant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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